SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________
FORM 10-K
/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Numbers 33-3630 and 333-1783
KEYPORT LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
Rhode Island 05-0302931
(State of incorporation) (I.R.S. Employer Identification No.)
125 High Street
Boston, Massachusetts 02110-2712
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (617) 526-1400
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each Class on which registered
Common Stock, Par Value $1.25 per
share
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months, and (2) has been
subject to such filing requirements for the past 90 days. Yes /x/ No /
/
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. / /
There were 2,412,000 shares of the registrant's Common Stock, $1.25
par value, outstanding as of March 27, 1997.
<PAGE>
KEYPORT LIFE INSURANCE COMPANY
ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 1996
TABLE OF CONTENTS
Part I
Page
Item 1. Business 1
Item 2. Properties 7
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security Holders 7
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 10
Item 6. Selected Financial Data 10
Item 7. Management's Discussion and Analysis of Results
of Operations and Financial Condition 10
Item 8. Consolidated Financial Statements and Supplementary
Data 15
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 16
Part III
Item 10. Directors and Executive Officers of the
Registrant 16
Item 11. Executive Compensation 16
Item 12. Security Ownership of Certain Beneficial Owners and
Management 20
Item 13. Certain Relationships and Related Transactions 20
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 21
<PAGE>
PART I
Item 1. Business
General
Keyport Life Insurance Company ("Keyport") is a specialty insurance
company providing a diversified line of fixed, equity-indexed and variable
annuity products designed to serve the growing retirement savings market.
These annuity products are sold through a wide ranging network of banks,
agents and securities dealers. Keyport seeks to (i) maintain its presence
in the fixed annuity market while expanding its sales of variable and
equity-indexed annuities, (ii) achieve a broader market presence through
the use of diversified distribution channels and (iii) maintain a
conservative approach to investment and liability management.
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 ("A.M. Best"),
independent analysts of the insurance industry. Keyport has been rated A+
each year since 1976, the first year Keyport was subject to A.M. Best's
alphabetic rating system. The A.M. Best's A+ rating is in the highest
rating category, which also includes A++.
Keyport's wholly owned subsidiaries are Independence Life and Annuity
Company ("Independence Life"), an insurance company; Keyport Advisory
Services Corporation, an investment advisory company; and, Keyport Financial
Services Corp., a broker-dealer (collectively the "Company").
Keyport is an indirect wholly owned subsidiary of Liberty Financial
Companies, Inc. ("Liberty Financial") which is a publicly traded holding
company. Liberty Financial is an indirect majority 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.
Liberty Financial is an asset accumulation and management company
providing investment management and retirement-oriented insurance products
through multiple distribution channels. Keyport issues and underwrites
substantially all of Liberty Financial's retirement-oriented insurance
products. Liberty Financial's investment advisor, asset management and
bank distribution operating units are The Colonial Group, Inc.
("Colonial"), Stein Roe & Farnham Incorporated ("Stein Roe"), Newport
Pacific Management, Inc. ("Newport") and Independent Holdings, Inc.
("Independent"). Colonial, Stein Roe and Newport manage certain underlying
mutual funds and other invested assets of Keyport's separate accounts.
Stein Roe also provides asset management services for a substantial portion
of Keyport's general account. Independent, through its subsidiary, markets
Keyport's products through the bank distribution channel.
Keyport's 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.
Recent Developments
On August 9, 1996, Keyport entered into a 100 percent coinsurance
agreement for a $954.0 million block of single premium deferred annuities
issued by Fidelity & Guaranty Life Insurance Company ("F&G Life"). Under
this transaction, the investment risk of the annuity policies was
transferred to Keyport. However, F&G Life will continue to administer the
policies and will remain contractually liable for the performance of all
policy obligations. This transaction increased investments by $923.1
million and value of insurance in force by $30.9 million.
Products
The Company sells a full range of retirement-oriented insurance products,
grouped by whether they provide fixed, indexed or variable returns to
policyholders. Annuities are insurance products designed to offer
individuals protection against the risk of outliving their income during
retirement. In addition to offering a tax-favored source of lifetime
income, annuities are also a tax-efficient means of accumulating savings
for retirement needs. The Company earns spread income from fixed and
indexed annuities; variable annuities primarily produce fee income for the
Company.
Fixed Annuities. Keyport's principal fixed annuity products are
individual single premium deferred annuities ("SPDAs"). A SPDA
policyholder typically makes a single premium payment at the time of
issuance. The Company obligates itself to credit interest to the
policyholder's account at a rate that is guaranteed for an initial term
(typically one year) and is reset annually thereafter, subject to a
guaranteed minimum rate. Interest crediting continues until the policy is
surrendered or the policyholder retires or turns age 90. At December 31,
1996, the Company's fixed annuity policyholder balances were $8.6 billion.
The Company's SPDA premiums in 1996 were $492.6 million. The average
premium payment for a SPDA sold by the Company in 1996 was $32,353.
Equity-Indexed Annuities. Equity-indexed annuities are an innovative
product first introduced to the marketplace in 1995 by the Company when it
began selling its KeyIndex product. An equity-indexed annuity credits
interest to the policyholder at a "participation rate" equal to a portion
of the change in value of a specified equity index. KeyIndex is currently
offered for one, five and seven-year terms with interest earnings based on
a percentage of the increase in the Standard & Poor's 500 Composite Stock
Price Index ("S&P 500 Index"). With the five and seven-year terms, the
interest earnings are based on the highest policy anniversary value of the
S&P 500 Index during the term. KeyIndex also provides a guarantee of
principal at the end of the term. Thus, unlike a direct equity investment,
even if the S&P 500 Index declines, there is no risk to principal. In
1996, the Company introduced a market value adjustment ("MVA") annuity
product which offers a choice between an equity-indexed account similar to
KeyIndex and a fixed annuity type interest account. The MVA product offers
terms for each account of one, three, five, six and seven years, as well as
a ten-year term for the fixed interest account. The MVA shifts some
investment risk to the policyholder, since surrender of the policy before
the end of the product term will result in increased or decreased account
values based on the change in rates of designated U.S. Treasury securities
since the beginning of the term. At December 31, 1996, the Company's
equity-indexed annuity policyholder balances were $787.8 million. The
Company's KeyIndex premiums in 1996 were $655.2 million. The average
premium payment for a KeyIndex policy sold by the Company in 1996 was
$30,623. The Company is continuing to develop new versions of the equity-
indexed annuity.
Variable Annuities. Variable annuities offer a selection of underlying
investment alternatives which may satisfy a variety of policyholder
objectives. In a variable annuity, the policyholder has the opportunity
to select separate account investment options (similar to mutual funds)
which pass the investment risk directly to the policyholder in return for
the potential of higher returns. Guaranteed fixed interest options also
are available. The Company's Keyport Advisor variable annuity currently
offers 17 separate account investment choices and four guaranteed fixed
interest options. At December 31, 1996, the Company's variable annuity
policyholder balances were $1.1 billion (including $193.8 million of fixed
interest liabilities). The average premium payment for a variable annuity
policy sold by the Company in 1996 was $47,154.
While the Company currently does not offer traditional life insurance
products, it manages a closed block of single premium whole life insurance
policies ("SPWLs"). SPWLs are a retirement-oriented tax-advantaged life
insurance product. The Company discontinued sales of SPWLs in response to
certain tax law changes. The Company had SPWL policyholder liabilities of
$2.0 billion at December 31, 1996. In addition, at that date the Company
had variable life insurance policyholder balances of $170.9 million. SPWLs
produce spread income, and variable life policies produce fee income.
Under current law, returns credited on annuities and life insurance
policies during the accumulation period (the period during which interest
is credited and payouts have not yet begun) are not subject to federal or
state income tax. Proceeds payable on death from a life insurance policy
are also free from such taxes. At the maturity or payment date of an
annuity policy, the policyholder is entitled to receive the original
deposit plus accumulated returns. The policyholder may elect to take this
amount in either a lump sum or an annuitized series of payments over time.
The return component of such payments is taxed at the time of receipt as
ordinary income.
The Company has two primary financial objectives for its retirement-
oriented insurance products: to increase policyholder balances through new
sales and asset retention and to earn a required investment spread on its
fixed and indexed return products.
The following table sets forth certain information regarding the
Company's retirement-oriented insurance business for the periods indicated.
<TABLE>
<CAPTION>
As of or for the Year Ended
December 31
1996 1995 1994
(dollars in thousands, except
policy data)
<S> <C> <C> <C>
Fixed Annuities in Force:
Aggregate amount $8,630,027 $7,761,075 $7,061,257
Average policy amount $36,479 $34,611 $33,247
Number of policies 236,574 224,238 212,390
Aggregate amount subject to surrender
charge $7,371,492 $6,903,524 $6,168.002
Indexed Annuities in Force:
Aggregate amount $787,848 $83,916 --
Average policy amount $32,591 $30,207 --
Number of policies 24,174 2,778 --
Aggregate amount subject to surrender
charge $787,848 $83,916 --
Variable Annuities in Force:
Aggregate amount $1,083,494 $949,938 $812,421
Average policy amount $43,035 $37,941 $31,985
Number of policies 25,177 25,037 25,400
Life Insurance in Force:
Aggregate amount $2,126,716 $2,157,415 $2,216,517
Average policy amount $79,207 $75,728 $72,756
Number of policies 26,850 28,489 30,465
Premiums (statutory-basis):
Fixed annuities $492,603 $977,182 $1,156,157
Indexed annuities $655,214 $83,971 --
Variable annuities $97,357 $80,382 $156,106
Life insurance, net of reinsurance $(447) $(554) $(541)
New Contracts and Policies:
Fixed annuities 11,358 30,043 45,557
Indexed annuities 21,396 2,778 --
Variable annuities 1,814 1,789 4,117
Life insurance -- -- --
Withdrawals and Terminations (statutory-
basis):
Fixed annuities:
Death $24,650 $14,966 $15,555
Maturity $87,433 $75,858 $64,571
Surrender $966,023 $692,560 $825,697
Indexed annuities:
Death $147 -- --
Maturity -- -- --
Surrender $3,025 $50 --
Variable Annuities:
Death $1,762 $426 $583
Maturity $21,287 $14,008 $15,668
Surrender $76,725 $92,187 $76,052
Life Insurance:
Death $53,292 $53,788 $49,349
Surrender $98,189 $95,332 $88,730
Other -- -- --
Policy and Separate Account Liabilities:
Fixed annuities $8,641,423 $7,771,661 $7,071,546
Indexed annuities $787,848 $83,916 --
Variable annuities $1,083,494 $949,938 $812,421
Life insurance $2,142,430 $2,167,968 $2,224,486
Surrender Rates:
Fixed annuities 11.79% 9.34% 12.34%
Indexed annuities 0.69% 0.12% --
Variable annuities 7.55% 10.46% 9.54%
Life insurance 4.58% 4.36% 3.73%
</TABLE>
Sales and Asset Retention
New product sales are influenced primarily by overall market conditions
impacting the attractiveness of these products, and by product features,
including interest crediting and participation rates, and innovations that
distinguish the Company's products from those of its competitors. Sales of
SPDAs tend to be sensitive to prevailing interest rates. Sales can be
expected to increase in interest rate environments when SPDA rates are
higher than rates offered by competing conservative fixed-return
investments, such as bank certificates of deposit. SPDA sales can be
expected to decline in interest rate environments when this differentiation
in rates is not present.
The Company's insurance products include important features designed to
promote both sales and asset retention, including crediting rates and
surrender charges. Initial interest crediting and participation rates on
fixed and indexed products significantly influence the sale of new
policies. Resetting of rates on SPDAs impacts retention of SPDA assets,
particularly on policies where surrender penalties have expired. At
December 31, 1996, crediting rates on 92% of the Company's in force SPDA
policy liabilities were subject to reset during the succeeding 12 months.
In setting crediting and participation rates, the Company takes into
account yield characteristics on its investment portfolio, surrender rate
assumptions and competitive industry pricing. Interest crediting rates on
the Company's in force SPDAs ranged from 4.0% to 8.0% at December 31, 1996.
Such policies had guaranteed minimum rates ranging from 3.0% to 4.5% .
Initial interest crediting rates on new policies issued in 1996 ranged from
4.65% to 7.15%. Guaranteed minimum rates on 1996 new policies ranged from
3.0% to 4.5%.
All of the Company's annuities permit the policyholder at anytime to
withdraw all or part of the accumulated value. Premature termination of an
annuity policy results in the loss of the Company's anticipated future
earnings related to the annuity deposit and the accelerated recognition of
expenses related to policy acquisition, principally commissions (which are
otherwise deferred and amortized over the life of the policy). Surrender
charges provide a measure of protection against premature withdrawal of
policy values. All of the Company's SPDAs currently are issued with
surrender charges. Such surrender charges typically start at 7% and then
decline to zero over a five- to seven-year period. At December 31, 1996,
85.4% of the Company's SPDAs remained in the surrender charge period.
Surrender charges generally do not apply to withdrawals by policyowners of
up to 10% per year of the then accumulated value of the annuity. In
addition, certain SPDAs allow the policyholder to withdraw accumulated
earnings in excess of the initial deposit without a surrender charge or may
provide for charge-free withdrawals in certain circumstances. SPDAs are
also subject to "free look" risk (the legal right of a policyholder to
cancel the policy and receive back the premium deposit, without interest,
for a period of up to one year, depending upon the state). While SPWLs
also permit withdrawal, it generally would produce significant adverse tax
consequences to the policyholder.
Keyport's strong financial ratings are important to its ability to
accumulate and retain assets. Keyport is rated A+ (Superior) by A.M. Best.
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. 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.
Customer service is essential to asset accumulation and retention. The
Company believes it has a reputation for excellent service to its
distributors and its policyholders. The Company has developed advanced
technology systems for immediate response to customer inquiries, and rapid
processing of policy issuance and commission payments (often at the point
of sale). These systems also play an important role in controlling costs.
Keyport's operating expense ratio for 1996 was 0.44% of assets, making the
Company one of the lowest cost operators in the annuity business.
General Account Investments
Premium deposits on fixed and equity-indexed annuities are credited to
the Company's general investment account. To achieve its required
investment spreads, the Company must earn returns on its general account
sufficiently in excess of the fixed or equity-indexed returns credited to
policyholders. The key element of this investment process is
asset/liability management. Successful asset/liability management requires
both a quantitative assessment of overall policy liabilities (including
maturities, surrenders and crediting of returns) and prudent investment of
general account assets. The two most important tools in managing policy
liabilities are setting crediting rates and establishing surrender periods.
The asset side of the investment process requires portfolio techniques that
earn required yields while effectively managing both interest rate risk and
credit risk. The Company emphasizes a conservative approach to
asset/liability management, which is oriented toward reducing downside risk
in adverse markets, as opposed to maximizing spread in favorable markets.
The approach is also designed to reduce earnings volatility.
The bulk of the Company's general account is invested in fixed maturity
securities (87.1% at December 31, 1996). The Company's principal strategy
for managing interest rate risk is to closely match the duration of its
investment portfolio to its policyholder balances. At December 31, 1996,
the effective duration of its fixed income portfolio was 2.8 years. The
Company employs hedging strategies to manage this risk, including interest
rate swaps and caps. In the case of equity-indexed products, the Company
purchases S&P 500 Index options to hedge its obligations to provide
participation rate returns. Credit risk is managed by careful credit
analysis and monitoring. At December 31, 1996, the Company's fixed maturity
portfolio had an overall average S&P rating of A+ and 92% of the Company's
general account portfolio consisted of investment grade securities. The
balance was invested in below investment grade securities to enhance
overall portfolio yield. Below investment grade securities pose greater
risks than investment grade securities. The Company actively manages its
below investment grade portfolio to optimize its risk/return profile. At
December 31, 1996, there were no non-income producing fixed maturity
investments.
Marketing and Distribution
The individual fixed annuity market in the United States is highly
fragmented. According to A.M. Best, the insurer with the largest market
share in each year during the five-year period ended December 31, 1995 (the
most recent period for which A.M. Best rankings currently are available)
captured less than 5.0% of the individual fixed annuity market. In 1995,
according to A.M. Best, writers of individual annuities collected aggregate
premiums of approximately $75.7 billion. Based on total individual annuity
premiums for 1995 (according to A.M. Best), Keyport ranked 14th in the
individual annuity industry with a 1.5% market share.
Keyport's sales strategy is to use multiple distribution channels to
achieve broader market presence. During 1996, the bank channel represented
approximately 39.6% of Keyport's annuity sales, and the brokerage channel
represented approximately 19.9%. The sale of insurance and investment
products through the bank distribution channel is highly regulated. Sales
through other distributors of insurance products, such as financial
planners and insurance agents, represented approximately 40.5% of total
annuity sales.
The following table presents sales information in Keyport's distribution
channels for the periods indicated (in millions).
<TABLE>
<CAPTION>
Sales of Fixed and Indexed Sales of Variable
Annuities Annuities
Year Ended December 31 Year Ended December
31
1996 1995 1994 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
Bank channel:
Independent $139.4 $ 91.7 $196.2 $ 1.3 $27.0 $60.5
Third party bank
marketers 311.2 427.1 638.9 40.9 7.1 10.4
Other channels:
Broker-dealers 211.7 392.5 193.6 36.6 45.3 82.8
Other distributors 485.6 149.9 127.5 18.5 1.0 2.5
</TABLE>
Regulation
The Company's business activities are extensively regulated. The
following briefly summarizes the principal regulatory requirements and
certain related matters.
Keyport's and Independence Life's retirement-oriented insurance products
generally are issued as individual policies. The policy is a contract
between the issuing insurance company and the policyholder. Policy forms,
including all principal contract terms, are regulated by state law.
Generally, the policy form must be approved by the insurance department or
similar agency of a state in order for the policy to be sold in that state.
Keyport and Independence Life are each chartered in Rhode Island, and
the Rhode Island Department of Business Regulation is their primary
oversight regulator. Keyport and Independence Life also must be licensed
by the state insurance regulators in each other jurisdiction in which they
conduct business. They currently are licensed to conduct business in 49
states (the exception being New York), and in the District of Columbia.
State insurance laws generally provide regulators with broad powers related
to issuing licenses to transact business, regulating marketing and other
trade practices, operating guaranty associations, regulating certain
premium rates, regulating insurance holding company systems, establishing
reserve requirements, prescribing the form and content of required
financial statements and reports, performing financial and other
examinations, determining the reasonableness and adequacy of statutory
capital and surplus, regulating the type and amount of investments
permitted, limiting the amount of dividends that can be paid and the size
of transactions that can be consummated without first obtaining regulatory
approval, and other related matters.
In recent years, various states have adopted new quantitative standards
promulgated by the National Association of Insurance Commissioners
("NAIC"). These standards are designed to reduce the risk of insurance
company insolvencies, in part by providing an early warning of financial or
other difficulties. These standards include the risk-based capital ("RBC")
requirements. RBC requirements attempt to measure statutory capital and
surplus needs based on the risks in a company's mix of products and
investment portfolio. The requirements provide for four different levels
of regulatory attention which implement increasing levels of regulatory
control (ranging from development of an action plan to mandatory
receivership). As of December 31, 1996, Keyport's capital was
approximately 2.3 times the level at which the lowest of these regulatory
attention levels would be triggered.
Under the insurance guaranty fund laws existing in each state, insurers
can be assessed for certain obligations of insolvent insurance companies.
Because assessments typically are not made for several years after an
insurer fails, Keyport cannot accurately determine the precise amount or
timing of its exposure to known insurance company insolvencies at this
time. For certain information regarding the Company's historical and
estimated future assessments, see Note 11 to the Company's Consolidated
Financial Statements.
Rhode Island law imposes prior approval requirements for certain
transactions with affiliates and generally regulates dividend payments by a
Rhode Island-chartered insurance subsidiary to its parent company. Keyport
may not make dividend payments in excess of the lesser of (i) 10% of its
statutory surplus as of the preceding December 31 or (ii) its statutory net
gain from operations for the preceding fiscal year without prior approval
by the Rhode island Department of Business Regulation. As of December 31,
1996, such restriction would limit dividends without such approval to
approximately $42.5 million. Keyport has not paid any dividends since its
acquisition in December, 1988.
Competition
The Company's business activities are conducted in extremely competitive
markets. Keyport competes with a large number of life insurance companies,
some of which are larger and more highly capitalized and have higher
ratings than Keyport. 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.
Management believes that Keyport competes principally with respect to
product features, pricing, ratings and service; management also believes
that Keyport can continue to compete successfully in this market by
offering innovative products and superior services. In addition, financial
institutions and broker-dealers focus on the insurer's ratings for
financial strength or claims-paying ability in determining whether to
market the insurer's annuities.
Employees
As of December 31, 1996, the Company had 358 full-time employees. The
Company provides its employees with a broad range of employee benefit
programs. The Company believes that its relations with its employees are
excellent.
Item 2. Properties
As of December 31, 1996, the Company maintained its executive,
administrative and sales offices in leased facilities. The Company leases
approximately 76,000 square feet in a single facility in downtown Boston
pursuant to a lease which expires in 2002. The Company also leases
approximately 10,500 square feet in a single facility in Providence, Rhode
Island and 7,700 square feet in a single facility in Maitland, Florida.
Item 3. Legal Proceedings
The Company is from time to time involved in litigation incidental to
its business. In the opinion of Keyport's management, the resolution of
such litigation is not expected to have a material adverse effect on the
Company's financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Directors and Principal Officers of the Registrant
The following are the principal officers and directors of the Company:
Position with Other Business,
Keyport Vocation or
Name, Age Year of Election Employment for Past
Five Years
Kenneth R. Leibler, 48 Chairman of the Chief Executive
Board, 12/31/94 Officer, 1/1/95;
formerly President
of Liberty Financial
Companies Inc.
F. Remington Ballou, 68 Director, 3/7/62 President of B. A.
Ballou & Co., Inc.,
East Providence, RI
Frederick Lippit, 80 Director, 3/7/62, and Chairman of The
Assistant Secretary Providence Plan,
4/9/69 Providence, RI
Robert C. Nyman, 61 Director, 4/11/96 President and
Chairman of Nyman
Manufacturing Co.,
East Providence, RI
John W. Rosensteel, 56 President, Chief Formerly Chief
Executive Officer, Operating Officer of
and Director, the Company,
12/30/92 11/5/92; Chairman of
the Board and
Director of KFSC,
11/12/92; Chairman
of the Board and
Director of KASC,
1/8/93; President,
Chief Executive
Officer, and
Chairman of the
Board of
Independence Life
and Annuity Co.,
10/1/93; formerly
Senior Vice
President Aetna Life
& Casualty,
Hartford, CT
John E. Arant, III, 52 Senior Vice President Vice President,
and Chief Sales Chief Sales Officer
Officer, 5/16/94 of KFSC,5/20/94;
Director, 3/1/95,
Senior Vice
President and Chief
Sales Officer,
5/20/94 of
Independence Life
and Annuity Company;
Director and Senior
Vice President and
Chief Sales Officer,
KASC, 3/10/95;
Formerly Vice
President of Aetna
Investment
Management Company
and Senior Vice
President of Aetna
Capital Management
Company
Bernard R. Beckerlegge, Senior Vice President Senior Vice
50 and General Counsel, President and
9/1/95 General Counsel of
Independence Life
and Annuity Company,
10/9/95; formerly
General Counsel for
B.T. Variable
Insurance Co.,
8/1/88
Stephen B. Bonner, 50 Senior Vice President, Formerly President
11/7/96 of Construction
Information Group
at McGraw Hill,
12/1/92; formerly
Vice President,
Prudential
Insurance Company
of America, 9/1/88
Paul H. LeFevre, Jr., 54 Senior Vice President Director and Senior
and Chief Financial Vice President and
Officer, 9/1/95 Chief Financial
Officer of KASC,
1/8/93; Director,
Senior Vice 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 Chief Vice President,
Administrative Administration,
Officer, 4/5/90 10/24/85, of KFSC;
Senior Vice
President and Chief
Administrative
Officer of KASC,
1/8/93; Senior Vice
President and Chief
Administrative
Officer of
Independence Life
and Annuity
Company, 10/1/93
Bruce J. Crozier, 51 Vice President and Vice President and
Chief Actuary, Chief Actuary of
11/9/90 Independence Life
and Annuity
Company, 10/1/93
James P. Greaton, 39 Vice President and Formerly Valuation
Corporate Actuary, Actuary, Providian
5/6/96 Capital Management,
5/94
Jeffery J. Lobo, 35 Vice President, Risk Formerly Assistant
Management, 5/4/96 Vice President of
Quantitative
Research for the
Company, 2/8/95;
formerly Vice
President of Credit
Suisse Financial
Products, 11/94;
trader for SBCI
Securities (Asia)
Inc. 7/93; trader
for O'Connor &
Associates, 5/92
Stewart R. Morrison, 40 Vice President and Vice President,
Chief Investment Investments, of
Officer, 5/6/94 KASC, 1/8/93; Vice
President and Chief
Investment Officer
of Independence
Life and Annuity
Company, 10/1/93;
formerly Vice
President of
Investments for the
Company, 8/92
Jeffery J. Whitehead, 40 Vice President and Vice President and
Treasurer, 5/4/95 Treasurer of
Independence Life
and Annuity,
5/4/95; formerly
Vice President and
Controller for the
Company, 8/92
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
Not applicable.
Item 6. Selected Financial Data (in thousands)
<TABLE>
As of and
for the
year ended
December 31 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Income
statement
data:
Investment
income $790,365 $755,930 $689,575 $669,667 $705,943
Interest
credited (572,719) (555,725) (481,926) (504,205) (571,033)
Investment
spread 217,646 200,205 207,649 165,462 134,910
Fee
income 33,534 29,767 25,273 18,158 14,504
Operating
expenses (43,815) (44,475) (54,295) (40,697) (65,730)
Income before
income taxes 137,846 107,941 95,276 86,705 31,397
Net
income 90,624 69,610 63,225 57,995 22,587
Balance
sheet data:
Total cash
and
investments $12,305,213 $10,922,125 $ 9,274,793 $ 8,912,526 $ 8,787,912
Total
assets 13,924,557 12,280,194 10,873,604 10,227,327 9,707,115
Stockholder's
equity 980,782 902,331 682,485 684,270 556,416
</TABLE>
Item 7. Management's Discussion and Analysis of Results of Operations
and Financial Condition
Results of Operations
Net income was $90.6 million in 1996 compared to $69.6 million in 1995
and $63.2 million in 1994. The improvement of $21.0 million in 1996
compared to 1995 resulted from higher investment spread, higher fee income
and net realized investment gains in 1996 compared to net realized
investment losses in 1995. Partially offsetting these items were increased
amortization of deferred policy acquisition costs and higher income tax
expense. The improvement of $6.4 million in 1995 compared to 1994
primarily resulted from lower operating expenses, decreased guaranty fund
expense and reduced amortization of value of insurance in force. Partially
offsetting these items were decreased investment spread and increased
amortization of deferred policy acquisition costs.
Investment spread is the amount by which investment income earned on the
Company's investments exceeds interest credited to policyholder balances.
Investment spread was $217.6 million in 1996 compared to $200.2 million in
1995 and $207.6 million in 1994. The amount by which the average yield on
investments exceeds the average interest credited rate on policyholder
balances is the investment spread percentage. Such investment spread
percentage was 1.84% in 1996 and 1995, and 2.12% in 1994. Assuming a
constant interest rate environment, the Company anticipates that the
investment spread percentage in 1997 will be comparable to 1996.
Investment income was $790.4 million in 1996 compared to $755.9 million
in 1995 and $689.6 million in 1994. Investment income increased in 1996
compared to 1995 primarily as a result of a higher level of average
invested assets, partially offset by a decrease in the average investment
yield. The average investment yield was 7.16% in 1996 compared to 7.51% in
1995. The decreased investment yield in 1996 reflects the lower interest
rates prevailing during the latter half of 1995 and early 1996 and the
amortization of S&P 500 Index options. Investment income increased in 1995
compared to 1994 primarily as a result of the higher level of average
invested assets. The investment yield increased slightly during 1995. The
average investment yield was 7.48% in 1994.
Interest credited to policyholders totaled $572.7 million in 1996
compared to $555.7 million in 1995 and $481.9 million in 1994. Interest
credited to policyholders increased in 1996 compared to 1995 primarily as a
result of a higher level of average policyholder balances, partially offset
by a decrease in the average interest credited rate. Policyholder balances
averaged $10.8 billion in 1996 compared to $9.8 billion in 1995. The
average interest credited rate was 5.32% in 1996 compared to 5.67% in 1995.
Interest credited to policyholders increased in 1995 compared to 1994 as a
result of the higher level of average policyholder balances and to an
increase in the average interest credited rate. Policyholder balances
averaged $9.8 billion in 1995 compared to $9.0 billion in 1994. The
average interest credited rate was 5.36% in 1994.
Average investments (computed without giving effect to SFAS 115),
including a portion of the Company's cash and cash equivalents, were $11.0
billion in 1996 compared to $10.1 billion in 1995 and $9.2 billion in 1994.
The increase of $0.9 billion in 1996 compared to 1995 was primarily due to
the F&G Life transaction and sales of the Company's fixed and equity-
indexed annuities during the period, offset in part by withdrawals of $1.1
billion. Fixed and equity-indexed annuity premiums totaled $1.2 billion in
1996 compared to $1.1 billion in 1995 and $1.2 billion in 1994. The
increase in premiums in 1996 compared to 1995 was primarily attributable to
the sales of equity-indexed annuities which were introduced during 1995,
partially offset by lower fixed annuity premiums. Sales of indexed
annuities during 1996 totaled $655.2 million compared to $83.9 million in
1995. The decrease in total premiums in 1995 compared to 1994 was primarily
due to lower interest rates prevailing during the latter half of 1995,
making fixed income products less competitive.
Net realized investment gains were $5.5 million in 1996 compared to net
realized investment losses of $4.0 million in 1995 and net realized
investment losses of $8.2 million in 1994. The net realized investment
gains in 1996 were primarily attributable to sales of fixed maturity
investments and sales of investments received in the F&G Life transaction
which were made to maximize total return. The net realized investment
losses in 1995 were attributable to sales of the Company's fixed maturity
investments which were made to maximize total return. The net realized
investment losses in 1994 were primarily due to write-downs of investments
whose declines in value were determined to be other than temporary.
Surrender charges are revenues earned on the early withdrawal of fixed,
indexed and variable annuity policyholder balances. Surrender charges on
fixed, equity-indexed and variable annuity withdrawals generally are
assessed at declining rates applied to policyholder withdrawals during the
first five to seven years of the contract. Total surrender charges were
$14.9 million in 1996 compared to $14.8 million in 1995 and $11.5 million
in 1994.
Total fixed, equity-indexed and variable annuity withdrawals represented
11.6%, 9.9% and 12.6% of the total average annuity policyholder and
separate account balances in 1996, 1995 and 1994, respectively. The
increase in withdrawals in 1996 was primarily attributable to surrenders of
annuities acquired in the F&G Life transaction; excluding these surrenders,
the withdrawal percentage in 1996 was 9.7%.
Separate account fees are primarily mortality and expense charges earned
on variable annuity and variable life policyholder balances. These fees,
which are based on the market values of the assets supporting the
contracts in separate accounts, were $16.0 million in 1996 compared to
$13.2 million in 1995 and $12.5 million in 1994. Such fees represented
1.68%, 1.61% and 1.63% of average variable annuity and variable life
separate account balances in 1996, 1995 and 1994, respectively.
Management fees are primarily investment advisory fees related to the
separate account assets. The fees are based on the levels of assets under
management, which are affected by product sales and redemptions and changes
in the market values of the investments managed. Management fees were $2.6
million in 1996 compared to $1.8 million in 1995 and $1.2 million in 1994.
The increase of $0.8 million in 1996 compared to 1995 primarily reflects a
higher level of average assets under management.
Operating expenses primarily represent compensation and other general
and administrative expenses. These expenses were $43.8 million in 1996
compared to $44.5 million in 1995 and $54.3 million in 1994. The decrease
in 1996 compared to 1995 was primarily due to IRS interest penalties of
$1.7 million recorded in 1995 related to a federal income tax assessment.
The decrease in 1995 compared to 1994 was attributable to lower guaranty
fund expense and lower state taxes.
Amortization of deferred policy acquisition costs was $60.2 million in
1996 compared to $58.5 million in 1995 and $52.2 million in 1994. The
increase in amortization in 1996 compared to 1995 was primarily due to a
decrease in estimated amortization periods determined in the last quarter
of 1995 due to shorter average policy lives, and to the growth of business
in force associated with fixed, equity-indexed and variable annuity sales.
The increase in 1995 compared to 1994 was primarily attributable to a
decrease in the estimated amortization periods and lower projected fixed
annuity surrender charges; in addition, this increase was attributable to
the growth in business in force during 1995 and 1994. Amortization expense
represented 0.51%, 0.55% and 0.53%, of the total average policyholder and
separate account balances during 1996, 1995 and 1994, respectively.
Amortization of value of insurance in force totaled $10.2 million in
1996 compared to $9.5 million in 1995 and $17.0 million in 1994. The
increase in amortization in 1996 compared to 1995 was primarily due to $2.7
million of amortization recorded in 1996 relating to the F&G Life
transaction, partially offset by lower amortization in 1996 due to an
increase in estimated amortization periods in the last quarter of 1995.
The decrease in amortization in 1995 compared to 1994 was primarily related
to the actual persistency experience and higher expected future profits
relating to the closed block of single premium whole life insurance.
Federal income tax expense was $47.2 million or 34.3% of pretax income
in 1996 compared to $38.3 million, or 35.5% pretax income in 1995, and
$32.1 million, or 33.6% of pretax income in 1994.
Financial Condition
Stockholder's Equity as of December 31, 1996 was $980.8 million compared
to $902.3 million as of December 31, 1995. The increase in stockholder's
equity was due to net income of $90.6 million, partially offset by a $12.2
million decrease in net unrealized investment gains during the period.
Investments not including cash and cash equivalents, totaled $11.5
billion as of December 31, 1996 compared to $10.1 billion as of December
31, 1995. This increase reflects the investments received in the F&G Life
transaction, fixed and equity-indexed annuity sales in 1996, withdrawals
and a decrease in net unrealized investment gains.
The Company's general investment policy is to hold fixed maturity assets
for long-term investment and, accordingly, the Company does not have a
trading portfolio. To provide for maximum portfolio flexibility and
appropriate tax planning, the Company classifies its entire fixed
maturities investments as "available for sale" and accordingly carries such
investments at fair value.
The Company's total investments at December 31, 1996 reflected net
unrealized gains of $229.8 million related to its fixed maturity and equity
portfolios. At December 31, 1995, such net unrealized investment gains
were $308.5 million. The decrease in net unrealized gains in 1996
principally reflects the higher interest rates at the end of 1996.
Approximately $10.7 billion, or 99.8%, of the fixed maturity investments
at December 31, 1996, was rated by Standard & Poor's Corporation, Moody's
Investors Service or under comparable statutory rating guidelines
established by the National Association of Insurance Commissioners
("NAIC"). At December 31, 1996, the carrying value of investments in below
investment grade securities totaled $987.0 million, or 8.0% of total cash
and investments of $12.3 billion. Below investment grade securities
generally provide higher yields and involve greater risks than investment
grade securities because their issuers typically are more highly leveraged
and more vulnerable to adverse economic conditions than investment grade
issuers. In addition, the trading market for these securities is usually
more limited than for investment grade securities.
Investment Management
Asset-liability duration management is utilized by the Company to
minimize the risks of interest rate fluctuations and disintermediation. The
Company believes that its fixed and equity-indexed policyholder balances
should be backed by investments, principally comprised of fixed maturities,
that generate predictable rates of return. The Company does not have a
specific target rate of return. Instead, its rates of return vary over time
depending on the current interest rates, the slope of the yield curve and
the excess at which fixed maturities are priced over the yield curve. Its
portfolio strategy is designed to achieve adequate risk-adjusted returns
consistent with the investment objectives of effective asset-liability
duration management, liquidity and credit quality.
The Company conducts its investment operations to closely match the
duration of the assets in its investment portfolio to its policyholder
balances. The Company seeks to achieve a predictable spread between what it
earns on its assets and what it pays on its policyholder balances by
investing principally in fixed maturities. The Company's fixed-rate and
equity-indexed products incorporate surrender charges to encourage
persistency, discourage withdrawals and make the cost of its policyholder
balances more predictable. Approximately 85.4% of the Company's fixed
annuity policyholder balances were subject to surrender charges at December
31, 1996.
As part of its asset-liability management discipline, the Company
conducts detailed computer simulations that model its fixed-maturity assets
and liabilities under commonly used stress-test interest rate scenarios.
Based on the results of these computer simulations, the investment
portfolio has been constructed with a view to maintaining a desired
investment spread between the yield on portfolio assets and the rate paid
on its policyholder balances under a variety of possible future interest
rate scenarios. At December 31, 1996 the effective duration of the
Company's fixed maturities investments (including certain cash and cash
equivalents) was approximately 2.8 years.
As a component of its investment strategy, the Company utilizes interest
rate swap agreements ("swap agreements") to match assets more closely to
liabilities. Swap agreements are agreements to exchange with counterparty
interest rate payments of differing character (e.g., fixed-rate payments
exchanged for variable-rate payments) based on an underlying principal
balance (notional principal) to hedge against interest rate changes. The
Company currently utilizes swap agreements to reduce asset duration and to
better match interest rates earned on longer-term fixed rate assets with
interest rates credited to policyholders. At December 31, 1996, the Company
had 39 outstanding swap agreements with an aggregate notional principal
amount of $2.3 billion. These agreements mature in various years through
2001. The Company uses indexed call options for purposes of hedging its
equity-indexed products. At December 31, 1996, the Company had call
options with a fair value of $109.6 million.
There are risks associated with some of the techniques the Company uses
to manage its asset and liability durations. The primary risk associated
with swap agreements is the risk associated with counterparty
nonperformance. The Company believes that the counterparties to its swap
agreements are financially responsible and that the counterparty risk
associated with these transactions is minimal. In addition, swap agreements
have interest rate risk. However, these swap agreements hedge fixed-rate
assets; interest rate movements that adversely affect the market value of
swap agreements generally are more than offset by changes in the market
values of such fixed rate assets.
The Company routinely reviews its portfolio of investment securities.
The Company identifies monthly any investments that require additional
monitoring, and carefully reviews the carrying value of such investments at
least quarterly to determine whether specific investments should be placed
on a nonaccrual basis and to determine declines in value that may be other
than temporary. In making these reviews, the Company principally considers
the adequacy of collateral (if any), compliance with contractual covenants,
the borrower's recent financial performance, news reports and other
externally generated information concerning the creditor's affairs. In the
case of publicly traded fixed maturity investments, management also
considers market value quotations if available.
Liquidity
The Company's liquidity needs and financial resources pertain to the
management of the general account assets and policyholder balances. The
Company uses cash for the payment of annuity and life insurance benefits,
operating expenses and policy acquisition costs, and the purchase of
investments. The Company generates cash from net investment income, annuity
premiums and deposits, and from maturities and sales of its investments.
Annuity premiums, maturing investments and net investment income have
historically been sufficient to meet the Company's cash requirements. The
Company monitors cash and cash equivalents in an effort to maintain
sufficient liquidity and has strategies in place to maintain sufficient
liquidity in changing interest rate environments. Consistent with the
nature of its obligations, the Company has invested a substantial amount of
its general account assets in readily marketable securities. At December
31, 1996, $8.8 billion of the Company's total investments, including short-
term investments, are considered readily marketable.
To the extent that unanticipated surrenders cause the Company to sell
for liquidity purposes a material amount of securities prior to their
maturity, such surrenders could have a material adverse effect on the
Company. However, the Company believes that liquidity to fund withdrawals
would be available through incoming cash flow, the sale of short-term or
floating-rate instruments or investment securities in its short duration
portfolio, thereby precluding the sale of fixed maturity investments in a
potentially unfavorable market.
Regulatory authorities permit dividend payments from the Company to
Liberty Financial up to the lesser of (i) 10% of statutory surplus as of
the preceding December 31 or (ii) the net gain from operations for the
preceding fiscal year. As of December 31, 1996, the Company could pay
dividends of up to $42.5 million without the approval of the Department of
Business Regulation of the State of Rhode Island.
Based upon the historical cash flow of the Company, the Company's
current financial condition and the Company's expectation that there will
not be a material adverse change in the results of operations of the
Company and its subsidiaries during the next twelve months, the Company
believes that cash flow provided by operating activities over this period
will provide sufficient liquidity for the Company to meet its liquidity
needs. The Company's cash flow may be influenced by, among other things,
general economic conditions, realized investment gains and losses, the
interest rate environment, market changes, regulatory changes and tax law
changes.
Effects of Inflation
Inflation has not had a material effect on the Company's consolidated
results of operations. The Company manages its investment portfolio in part
to reduce its exposure to interest rate fluctuations. In general, the fair
value of the Company's fixed maturity portfolio increases or decreases in
inverse relationship with fluctuations in interest rates, and the Company's
net investment income increases or decreases in direct relationship with
interest rate changes. If interest rates decline the Company's fixed
maturity investments generally will increase in fair value, while net
investment income will decrease as fixed maturity investments mature or are
sold and the proceeds are reinvested at reduced rates. However, inflation
may result in increased operating expenses that may not be readily
recoverable in the prices of the services charged by the Company.
Item 8. Consolidated Financial Statements and Supplementary Data
The Company's consolidated financial statements begin on page F-2.
Reference is made to the Index to Financial Statements on page 21 herein.
Additional financial statement schedules are included on pages S-2
through S-4 herein. Reference is made to the Index to Financial Statement
Schedules on page 21 herein.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial
Disclosure
The consolidated financial statements of Keyport and also Liberty
Financial and its subsidiaries, including Keyport, for the year ended
December 31, 1996 have been audited and reported upon by Ernst & Young LLP
("E&Y"). Similarly, E&Y will serve as independent auditors of Keyport and
Liberty Financial for 1997.
For fiscal years prior to 1996, the consolidated financial statements of
Keyport and Liberty Financial and its subsidiaries, were audited and
reported on by KPMG Peat Marwick LLP ("KPMG"). On March 13, 1996,
following a competitive proposal process, the Liberty Financial's Audit
Committee terminated KPMG's appointment as independent accountants for
Liberty Financial and its audited subsidiaries, including Keyport,
effective March 14, 1996, and voted to recommend to the Liberty Financial
Board of Directors that E&Y be appointed as Liberty Financial's
independent accountants for fiscal year 1996. The Liberty Financial Board
of Directors approved this recommendation on April 10, 1996. On April 11,
Keyport's Board of Directors approved such engagement of E&Y.
In connection with the audits of Keyport's financial statements for the
two fiscal years in the period 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 consolidated 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.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information relating to the executive officers of the registrant appears
under the caption "Executive Officers of the Registrant" included in Part I
of this Form 10-K following Item 4.
Item 11. Executive Compensation
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 $38.875 per
share, which was the closing price of the Common Stock on the New York
Stock Exchange on December 31, 1996 (the last trading day of 1996). None
of the named executive officers received any perquisites during 1996
exceeding the lesser of $50,000 or 10% of such officer's total salary and
bonus for such year.
Summary Compensation Table. The following table sets forth compensation
information for 1996 for each of Keyport's chief executive officer and the
other four most highly compensated executive officers:
Summary Compensation Table
1996 Compensation
<TABLE>
<CAPTION> Securities All Other
Name and Base Salary Bonus Underlying Compensation
Principal ($) ($)1 Options (#) ($)2
<S> <C> <C> <C> <C>
John W. Rosensteel, 396,500 275,000 15,000 27,993
President and Chief
Executive Officer
Paul LeFevre, Jr., 275,000 155,000 9,000 15,638
Senior Vice
President and Chief
Financial Officer
John E. Arant, III 215,000 100,000 5,000 96,063
Senior Vice
President and Chief
Sales Officer
Francis E. Reinhart, 233,000 105,000 7,500 13,136
Senior Vice President
and Chief
Administrative Officer
Bernard R.
Beckerlegge, 185,000 85,000 7,000 31,481
Senior Vice President
& General Counsel
</TABLE>
____________________________________________
1 The amounts presented are bonuses earned in 1996 and paid in 1997.
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, $22,993; Mr. LeFevre, $15,638; Mr.
Arant, $15,063; Mr. Reinhart, $13,136; and Mr. Beckerlegge, $1,734; (c) in
the case of Mr. Arant, $81,000 for a sales incentive bonus; and (d) in the
case of Mr. Beckerlegge, $29,747 of moving expenses reimbursement.
Option Grant Table. The following table sets forth certain information
regarding options to purchase Common Stock granted during 1996 by Liberty
Financial to the executive officers named in the above summary compensation
table.
<TABLE>
<CAPTION> Option Grants in Last Fiscal Year
Name Number of Percent Exercise Expiration Potential
Securities of Total Price on Date1 Realizable
Underlying Options Per Value at
Options Granted to Share ($) Assumed
Granted (#) Employees Annual
in 1996 Rates of
Stock Price
Appreciation
for Option
Term ($)2
5% 10%
<S> <C> <C> <C> <C> <C> <C>
John W.
Rosensteel 15,000 2.45% 33.00 5/06/06 311,303 788,903
Paul
LeFevre, Jr. 9,000 1.47% 33.00 5/06/06 186,782 473,342
John E.
Arant, III 5,000 0.82% 33.00 5/06/06 103,768 262,968
Francis E.
Reinhart 7,500 1.23% 33.00 5/06/06 155,651 394,451
Bernard R.
Beckerlegge 7,000 1.14% 33.00 5/06/06 145,275 368,155
</TABLE>
_____________________
1 Each option becomes exercisable in four equal annual installments
commencing on May 7, 1997, and vests in full upon the death, disability or
retirement of the optionee.
2 Amounts represent hypothetical gains that could be achieved for the
respective options if such options are not exercised until the end of the
option term. These gains are based on assumed rates of stock price
appreciation of 5% and 10% in accordance with applicable SEC regulations,
compounded annually from the dates the options were granted until their
expiration dates and, therefore, are not intended to forecast possible
future appreciation in the Common Stock. This table does not take into
account any appreciation in the price of the Common Stock after the date of
grant.
Option Exercises and Year-End Values Table. The following table sets
forth certain information regarding (i) the 1996 exercises of stock options
and (ii) the stock options held as of December 31, 1996 by the executive
officers named in the above summary compensation table.
Aggregate Option Exercises in Last Financial Year and Option Values at
Fiscal Year-End
<TABLE>
<CAPTION>
Shares Value Number of Value of
Acquired Realize Securities Unexercised
Upon Underlying In-the-Money
Exercise Unexercised Options at
Options at Year-End
Name (#) ($) Year-End (#)
Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C> <C> <C>
John W.
Rosensteel 5,500 114,230 39,848 51,211 868,954 737,888
Paul
LeFevre, Jr 4,000 112,456 39,470 22,944 1,096,402 363,953
John E.
Arant, III ---- ---- 8,531 17,282 130,540 209,149
Francis E.
Reinhart 500 14,057 18,470 14,496 503,370 174,380
Bernard R.
Beckerlegge ---- ---- ---- 7,000 ---- 41,125
</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 Keyport's Pension Plans.
Estimated Annual Retirement Benefits at Age 65
under Pension Plans
Years of Service
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, $583,500; Mr.
LeFevre, $386,666; Mr. Reinhart, $320,000; Mr. Arant, $386,500; and Mr.
Beckerlegge, $210,000. 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 December 31, 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, 4
years; Mr. LeFevre, 17 years; Mr. Arant, 3 years; Mr. Reinhart, 12 years;
and Mr. Beckerlegge, 1 year.
Change of Control Provisions of 1990 Stock Option Plan. Liberty
Financial's 1990 Stock Option Plan, as amended (the "1990 Plan"), provided
for the grant of options to officers and other key employees of Liberty
Financial for the purchase of shares of common stock. As of March 10,
1997, options issued and outstanding under the 1990 Plan included 61,059
shares held by Mr. Rosensteel (44,417 of which were vested), 45,914 shares
held by Mr. LeFevre (39,470 of which were then vested); and 19,466 shares
held by Mr. Reinhart (16,970 of which were then vested). No additional
options will be granted under the 1990 Plan. Upon a change of control of
Liberty Financial (defined as the transfer of 50% or more of the equity
ownership of Liberty Financial other than solely pursuant to a public
offering in which securities are issued for cash), all non-vested options
will automatically vest and Liberty Financial's Compensation and Stock
Option Plan committee may, in its discretion, elect to cancel all
outstanding options by paying the holders thereof an amount equal to the
difference between the formula value of the Common Stock (as defined in the
1990 Plan) and the exercise price of the options.
Compensation of Directors. Directors of Keyport who are also employees
receive no compensation in addition to their compensation as employees of
Keyport. The three outside directors (Lippitt, Ballou, and Nyman) receive
$2,000 per quarter, plus $500 for each meeting of the Board of Directors
and $200 for each Audit Committee meeting that they attend. Three meetings
of the Board of Directors and two meetings of the Audit Committee are
scheduled annually.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Keyport is a wholly owned, indirect subsidiary of Liberty Financial which
is a registrant under the Securities Exchange Act of 1934. Liberty
Financial is a majority owned, indirect subsidiary of Liberty Mutual
Insurance Company.
Item 13. Certain Relationships and Related Transactions
As noted in Item 12, Keyport is a wholly owned, indirect subsidiary of
Liberty Financial.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial Statements Page
Report of Independent Auditors F-1
Independent Auditors' Report F-1a
Consolidated Balance Sheet, December 31, 1996 and 1995 F-2
Consolidated Income Statement for the Years Ended
December 31, 1996, 1995 and 1994 F-3
Consolidated Statement of Stockholder's Equity for the
Years Ended December 31, 1996, 1995 and 1994 F-4
Consolidated Statement of Cash Flows for the Years
Ended December 31, 1996, 1995 and 1994 F-5
Notes to Consolidated Financial Statements F-6 through F-20
2. Financial Statement Schedules
I--Summary of Investments S-2
III-- Supplementary Insurance Information S-3
V-- Valuation and Qualifying Accounts S-4
All other schedules are omitted because they are not applicable or are
not required, or because the required information is included in the
Consolidated Financial Statements or notes thereto.
(b) Exhibits
The exhibits filed as part of this Report are listed on the Exhibit
Index immediately preceding the Exhibits.
(c) Reports on Form 8-K.
No reports on Form 8-K were filed by the Registrant during the fourth
quarter of 1996.
<PAGE>
Report of Independent Auditors
The Board of Directors
Keyport Life Insurance Company
We have audited the accompanying consolidated balance sheet of Keyport
Life Insurance Company as of December 31, 1996, and the related
consolidated statements of income, stockholder's equity, and cash flows for
the year then ended. Our audit also included the financial statement
schedules listed in the Index at Item 14(a). These financial statements
and schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedules based on our audit.
We conducted our audit 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 the significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Keyport Life Insurance Company at December 31, 1996 and the
consolidated results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles. Also,
in our opinion, the related financial statement schedules, when considered
in relation to the basic financial statements taken as a whole, present
fairly in all material respects the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, in
1994, the Company changed its method of accounting for certain investments
in debt and equity securities.
Boston, Massachusetts /s/ Ernst & Young LLP
February 5, 1997
<PAGE>
Independent Auditor's Report
The Board of Directors
Keyport Life Insurance Company
We have audited the consolidated financial statements of Keyport Life Insurance
Company and subsidiaries as of December 31, 1995 and 1994, and for each of the
years in the two year period ended December 31, 1995, as listed in the
accompanying index. In connection with our audits of the consolidated financial
statements, we also have audited the financial statement schedules as of
December 31, 1995 and 1994 as listed in the accompanying index. These
consolidated financial statements and financial statement schedules are the
responsibilty of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedules 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
two-year period ended December 31, 1995, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedules, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material respects, the
information set forth therein.
As discussed in note 1 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.
/s/KPMG Peat Marwick LLP
Boston, Massachusetts
February 16, 1996
<PAGE>
KEYPORT LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION> December 31
ASSETS 1996 1995
<S> <C> <C>
Cash and investments:
Fixed maturities available for sale
(amortized cost: 1996 - $10,500,431;
1995 - $9,227,834) $10,718,644 $ 9,535,948
Equity securities (cost: 1996 - $19,412; 35,863 25,214
1995 - $17,521)
Mortgage loans 67,005 74,505
Policy loans 532,793 498,326
Other invested assets 183,622 10,748
Cash and cash equivalents 767,385 777,384
Total cash and investments 12,305,312 10,922,125
Accrued investment income 146,778 132,856
Deferred policy acquisition costs 250,355 179,672
Value of insurance in force 70,819 43,939
Intangible assets 19,186 20,314
Federal income taxes recoverable 323 9,205
Other assets 40,316 12,859
Separate account assets 1,091,468 959,224
Total assets $13,924,557 $12,280,194
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Policy liabilities $11,637,528 $10,084,392
Current federal income taxes 13,123 7,666
Deferred federal income taxes 25,747 32,823
Payable for investments purchased
and loaned 211,234 317,715
Other liabilities 38,476 46,161
Separate account liabilities 1,017,667 889,106
Total liabilities 12,943,775 11,377,863
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 73,599 85,772
Retained earnings 398,235 307,611
Total stockholder's equity 980,782 902,331
Total liabilities and stockholder's equity $13,924,557 $12,280,194
</TABLE>
See accompanying notes
KEYPORT LIFE INSURANCE COMPANY
CONSOLIDATED INCOME STATEMENT
(in thousands)
<TABLE>
<CAPTION> Year Ended December 31
1996 1995 1994
<S> <C> <C> <C>
Revenues:
Investment income $790,365 $755,930 $689,575
Interest credited to policyholders (572,719) (555,725) (481,926)
Investment spread 217,646 200,205 207,649
Net realized investment gains (losses) 5,509 (3,958) (8,220)
Fee income:
Surrender charges 14,934 14,772 11,545
Separate account fees 15,987 13,154 12,495
Management fees 2,613 1,841 1,233
Total fee income 33,534 29,767 25,273
Expenses:
Policy benefits (3,477) (4,448) (4,838)
Operating expenses (43,815) (44,475) (54,295)
Amortization of deferred policy
acquisition costs (60,225) (58,541) (52,174)
Amortization of value of insurance
in force (10,196) (9,479) (16,989)
Amortization of intangible assets (1,130) (1,130) (1,130)
Total expenses (118,843) (118,073) (129,426)
Income before federal income tax
expense 137,846 107,941 95,276
Federal income tax expense (47,222) (38,331) (32,051)
Net income $ 90,624 $ 69,610 $ 63,225
</TABLE>
See accompanying notes
<PAGE>
KEYPORT LIFE INSURANCE COMPANY,
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
(in thousands)
<TABLE>
<CAPTION>
Net
Unrealized
Additional Investment
Common Paid-in Gains Retained
Stock Capital (Losses) Earnings Total
<S> <C> <C> <C> <C> <C>
Balance,
January 1, 1994 $ 1,508 $505,933 $ 546 $176,283 $684,270
Adjustment to
beginning balance
for change in
accounting
principle, net of
federal income
taxes 41,614 41,614
Net income 63,225 63,225
Common stock dividend
(1,206 shares) 1,507 (1,507)
Change in net
unrealized investment
gains (losses) (106,624) (106,624)
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
Net income 90,624 90,624
Change in net unrealized
investment gains
(losses) (12,173) (12,173)
Balance,
December 31, 1996 $ 3,015 $505,933 $ 73,599 $398,235 $980,782
</TABLE>
See accompanying notes
<PAGE>
KEYPORT LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION> Year Ended December 31
1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating
activities:
Net income $ 90,624 $ 69,610 $ 63,225
Adjustments to reconcile net
income to net cash provided
by operating activities:
Interest credited to
policyholders 572,719 555,725 481,926
Net realized investement
(gains) losses (5,509) 3,958 8,220
Amortization of value of
insurance in force and
intangible assets 11,326 10,609 18,120
Net amortization on
investements (29,088) 9,688 12,215
Change in deferred
policy acquisition costs (24,403) (24,630) (38,852)
Change in current and
deferred federal income
taxes 4,938 1,953 7,731
Net change in other assets
and liabilities (42,634) (62,375) (16,718)
Net cash provided by
operating activities 577,973 564,538 535,867
Cash flow from investing activities:
Investments purchased -
held to maturity -- -- (277,626)
Investments purchased -
available for sale (4,363,074) (2,851,013) (2,624,493)
Investments sold -
held to maturity -- 14,930 10,637
Investments sold -
available for sale 1,714,023 605,197 950,885
Investments matured -
held to maturity -- 317,773 576,021
Investments matured -
available for sale 1,387,664 906,522 854,441
Increase in policy loans (34,467) (21,033) (35,143)
Decrease in mortgage loans 7,500 54,947 26,520
Other assets purchased, net (130,087) -- --
Value of business acquired,
net of cash (30,865) -- (961)
Net cash used in
investing activities (1,449,306) (927,677) (519,719)
Cash flows from financing
activities:
Withdrawals from
policyholder accounts (1,154,087) (933,785) (1,034,464)
Deposits to policyholder
accounts 2,134,504 1,116,975 1,202,076
Securities lending (119,083) 317,715 --
Net cash provided by
financing activities 861,334 500,905 167,612
Change in cash and cash equivalents (9,999) 92,766 183,760
Cash and cash equivalents at
beginning of year 777,384 684,618 500,858
Cash and cash equivalents at end
of year $767,385 $777,384 $684,618
</TABLE>
See accompanying notes
<PAGE>
KEYPORT LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
1. Accounting Policies
Organization
Keyport Life Insurance Company offers a diversified line of fixed,
indexed, and variable annuity products designed to serve the growing
retirement saving market. These annuity products are sold through a wide
ranging network of banks, agents, and securities dealers.
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").
Principles of Consolidation
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 Corp., (collectively the "Company").
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles which vary in
certain respects from reporting practices prescribed or permitted by state
insurance regulatory authorities. All significant intercompany transactions
and balances have been eliminated. Certain prior year amounts have been
reclassified to conform to the current year's presentation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
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"). Investments in debt and equity
securities classified as available for sale are carried at fair value, and
after-tax unrealized gains and losses (net of adjustments to deferred
policy acquisition costs and value of insurance in force) are reported as a
separate component of stockholder's equity. Realized investment gains and
losses are calculated on a first-in, first-out basis.
On December 31, 1995, pursuant to the "Guide to Implementation of
Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities," the Company made a one-time reclassification of certain fixed
maturity securities from held to maturity to available for sale. The
amortized cost of those securities at the time of transfer was $1.4
billion, and the unrealized gain of $13.9 million was recorded net of taxes
in stockholder's equity.
For the mortgage backed bond portion of the fixed maturity investment
portfolio, the Company recognizes income using a constant effective yield
based on anticipated prepayments over the estimated economic life of the
security. When actual prepayments differ significantly from anticipated
prepayments, the effective yield is recalculated to reflect actual payments
to date and anticipated future payments and any resulting adjustment is
included in investment income.
Mortgage loans are carried at amortized cost. Policy loans are carried
at the unpaid principal balances plus accrued interest.
Fee Income
Fees from investment advisory services are recognized as revenues when
services are provided. Revenues from fixed and variable annuities and
single premium whole life policies include mortality charges, surrender
charges, policy fees, and contract fees and are recognized when earned.
Deferred Policy Acquisition Costs
Policy acquisition costs are the costs of acquiring new business which
vary with, and are primarily related to, the production of new business.
Such costs include commissions, costs of policy issuance, underwriting,
and selling expenses. These costs are deferred and amortized in relation
to the present value of estimated gross profits from mortality, investment,
and expense margins. Deferred policy acquisition costs are adjusted for
amounts relating to unrealized gains and losses on fixed maturity
securities the Company has designated as available for sale. This
adjustment, net of tax, is included with the change in net unrealized gains
or losses that is credited or charged directly to stockholder's equity.
Deferred policy acquisition costs have been decreased by $103.7 million at
December 31, 1996, and decreased by $151.4 million at December 31, 1995 for
this adjustment.
Value of Insurance in Force
Value of insurance in force represents the actuarially-determined
present value of projected future gross 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 15 years for
annuities and 25 years for life insurance. Interest is accrued on the
unamortized balance at the contract rate of 5.30%, 5.58% and 5.49% for the
years ended December 31, 1996, 1995 and 1994, respectively.
The value of insurance in force is adjusted for amounts relating to the
recognition of unrealized investment gains and losses. This adjustment,
net of tax, is included with the change in net unrealized gains or losses
that is credited or charged directly to stockholder's equity. Value of
insurance in force has decreased by $26.0 million at December 31, 1996, and
decreased by $32.5 million at December 31, 1995 for this adjustment.
Estimated net amortization expense of the value of insurance in force as
of December 31, 1996 is as follows (in thousands): 1997 - $14,237; 1998 -
$12,206; 1999 - $11,236; 2000 - $10,034; 2001 - $8,582; and thereafter -
$40,506.
Intangible Assets
Intangible assets consist of goodwill arising from business combinations
accounted for as a purchase. Amortization is provided on a straight-line
basis over twenty-five years.
Separate Account Assets and Liabilities
The assets and liabilities resulting from variable annuity and variable
life policies are segregated in separate accounts. Separate account assets,
which are carried at fair value, consist principally of investments in
mutual funds. Investment income and changes in asset values are allocated
to the 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. As of December 31, 1996 and
1995, Keyport also classified as separate account assets $73.8 million and
$72.5 million, respectively, of its investments in certain mutual funds
sponsored by affiliates of the Company.
Policy Liabilities
Policy liabilities consist of deposits received plus credited interest,
less accumulated policyholder charges, assessments, and withdrawals related
to deferred annuities and single premium whole life policies. Policy
benefits that are charged to expense include benefit claims incurred in the
period in excess of related policy account balances.
Income Taxes
Keyport Life Insurance Company, Keyport Advisory Services Corporation,
and Keyport Financial Services Corp. are included in the consolidated
federal income tax return filed by Liberty Mutual. Income taxes have been
provided using the liability method in accordance with SFAS No. 109,
"Accounting for Income Taxes," and are calculated as if the companies filed
their own income tax returns. Independence Life is required under tax law
to file its own federal income tax return.
Cash Equivalents
Short-term investments having an original maturity of three months or
less are classified as cash equivalents.
Recent Accounting Pronouncement
In June 1996, the Financial Accounting Standards Board issued SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities" ("SFAS 125"). The relevant provisions of
SFAS 125 relating to securities lending, dollar rolls, and other similar
secured transactions become effective after December 31, 1997. It is not
expected that the adoption of SFAS 125 will have a material effect on the
Company's consolidated financial position or results of operations.
2. Acquisitions
On August 9, 1996, Keyport entered into a 100 percent coinsurance
agreement for a $954.0 million block of single premium deferred annuities
issued by Fidelity & Guaranty Life Insurance Company ("F&G Life"). Under
this transaction, the investment risk of the annuity policies was
transferred to Keyport. However, F&G Life will continue to administer the
policies and will remain contractually liable for the performance of all
policy obligations. This transaction increased investments by $923.1
million and value of insurance in force by $30.9 million.
3. Investments
Fixed Maturities
As of December 31, 1996 and 1995, the Company did not hold any
investments in fixed maturities that were classified as held to maturity or
trading securities. The amortized cost, gross unrealized gains and losses
and fair value of fixed maturity securities are as follows (in thousands):
<TABLE>
<CAPTION> Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
December 31, 1996
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 35,308 $ 130 $ (87) $ 35,351
Mortgage backed securities
of U.S. government
corporations and
agencies 1,666,094 41,401 (8,569) 1,698,926
Obligations of states
and political
subdivisions 23,895 382 (49) 24,228
Debt securities issued
by foreign governments 246,339 11,718 (554) 257,503
Corporate securities 4,093,473 153,422 (12,298) 4,234,597
Other mortgage backed
securities 2,413,020 47,596 (23,970) 2,436,646
Asset backed
securities 1,736,012 15,531 (6,440) 1,745,103
Senior secured loans 286,290 - - 286,290
Total fixed maturities $10,500,431 $ 270,180 $ (51,967) $10,718,644
</TABLE>
<TABLE>
<CAPTION> Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
December 31, 1995
<S> <C> <C> <C> <C>
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 $9,227,834 $ 394,082 $ (85,968) $9,535,948
</TABLE>
At December 31, 1996, gross unrealized gains on equity securities,
interest rate cap agreements and investments in separate accounts
aggregated $29.9 million, and gross unrealized losses aggregated $5.3
million, respectively. At December 31, 1995, gross unrealized gains on
equity securities, interest rate cap agreements and investments in separate
accounts aggregated $16.9 million, and gross unrealized losses aggregated
$9.3 million, respectively.
Contractual Maturities
The amortized cost and fair value of fixed maturities by contractual
maturity as of December 31, 1996 are as follows (in thousands):
<TABLE>
<CAPTION> Amortized Fair
Cost Value
December 31, 1996
<S> <C> <C>
Due in one year or less $ 487,373 $ 489,136
Due after one year through five years 1,522,400 1,559,816
Due after five years through ten years 2,013,432 2,084,939
Due after ten years 662,100 704,078
4,685,305 4,837,969
Mortgage and asset backed securities 5,815,126 5,880,675
$10,500,431 $10,718,644
</TABLE>
Actual maturities will differ in some cases from those shown above
because borrowers may have the right to call or prepay obligations.
Net Investment Income
Net investment income is summarized as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31 1996 1995 1994
<S> <C> <C> <C>
Fixed maturities $ 737,372 $ 681,998 $ 635,947
Mortgage loans and other invested assets 11,422 12,881 15,416
Policy loans 30,188 28,485 26,295
Equity securities 4,494 4,807 2,132
Cash and cash equivalents 36,138 41,643 20,727
Gross investment income 819,614 769,814 700,517
Investment expenses (12,708) (10,837) (10,118)
Amortization of options and interest
rate caps (16,541) (3,047) (824)
Net investment income $ 790,365 $ 755,930 $ 689,575
</TABLE>
There were no non-income producing fixed maturity investments as of
December 31, 1996 or 1995.
Net Realized Investment Gains (Losses)
Net realized investment gains (losses) are summarized as follows (in
thousands):
<TABLE>
<CAPTION> 1996 1995 1994
Year Ended December 31
<S> <C> <C> <C>
Fixed maturities held to maturity:
Gross gains $ - $ 1,306 $ 3,493
Gross losses - (64) (755)
Fixed maturities available for sale:
Gross gains 24,304 8,156 26,043
Gross losses (17,814) (15,982) (26,831)
Equity securities 916 1,279 (845)
Interest rate swaps - (860) (28)
Other (208) (13) (809)
Impairment write-downs - - (11,514)
Gross realized investment gains (losses) 7,198 (6,178) (11,246)
Amortization adjustments of deferred
policy acquisition costs and value of
insurance inforce (1,689) 2,220 3,026
Net realized investment gains (losses) $ 5,509 $ (3,958) $ (8,220)
</TABLE>
Proceeds from sales of fixed maturities available for sale were $1.7
billion, $565.4 million and $927.8 million, for the years ended December
31, 1996, 1995, and 1994, respectively. The sale of fixed maturities held
to maturity during 1995 and 1994 relate to certain securities, with
amortized cost of $15.0 million and $10.6 million, respectively, which were
sold specifically due to a decline in the issuers' credit quality.
Deferred tax liabilities for the Company's unrealized holding gains and
losses, net of adjustments to deferred policy acquisition costs and value
of insurance inforce were $39.5 million and $46.2 million at December 31,
1996 and 1995, respectively.
No investment in any person or its affiliates (other than bonds issued
by agencies of the United States government) exceeded ten percent of
stockholder's equity at December 31, 1996.
At December 31, 1996, the Company did not have a material concentration
of financial instruments in a single investee, industry or geographic
location.
At December 31, 1996, $987.0 million of fixed maturities were below
investment grade.
4. Off Balance Sheet Financial Instruments
The Company's primary objective in acquiring off balance sheet 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 primarily
include managing the effective duration of portfolio securities and
utilizing interest rate swaps and caps. Outstanding off balance sheet
financial instruments, shown in notional amounts along with their carrying
value and fair values, are as follows (in thousands):
<TABLE>
<CAPTION> Assets (Liabilities)
Carrying Fair Carrying Fair
Notional Amounts Value Value Value Value
December 31 1996 1995 1996 1996 1995 1995
<S> <C> <C> <C> <C> <C> <C>
Interest rate
cap agreements $ 450,000 $ 450,000 $ 6,192 $ 1,363 $ 8,755 $ 1,461
Indexed call
options - - 109,561 109,561 7,785 7,785
Interest rate
swaps 2,275,000 1,975,000 (8,753) (8,753) (64,124) (64,124)
</TABLE>
The interest rate cap agreements, which expire in 1997 through 2000,
entitle the Company to receive payments from the counterparties on
specified future dates, contingent on future interest rates. For each cap,
the amount of such payment, if any, is determined by the excess of a market
interest rate over a specified cap rate times the notional amount. The
premium paid for the interest rate caps is included in other invested
assets and is being amortized over the terms of the agreements and is
included in net investment income. Interest rate contracts relating to
investments designated as available for sale are adjusted to fair value
with the resulting unrealized gains and losses included in stockholder's
equity. Fair values for these contracts are based on current settlement
values. The current settlement values are based on quoted market prices
and brokerage quotes, which utilize pricing models or formulas using
current assumptions.
The Company uses indexed call options for purposes of hedging its equity-
indexed products. The call options hedge the interest credited on these 1
and 5 year term products, which is based on the changes in the Standard &
Poor's 500 Composite Stock Price Index ("S&P Index"). Premiums paid on the
call options are amortized to interest expense over the terms of the
underlying equity-indexed products using the straight line method. Gains
and losses, if any, resulting from the early termination of the call option
are deferred and amortized to interest credited over the remaining term of
the underlying equity-indexed products.
At December 31, 1996 the Company had approximately $73.1 million of
unamortized premium in call option contracts. The call options' maturities
range from 1997 to 2001. The Company carries its S&P Index call options at
market value.
Deferred losses of $7.9 million and $10.6 million as of December 31,
1996 and 1995, respectively, resulting from terminated interest rate swap
agreements are included with the related fixed maturity securities to which
the hedge applied and are being amortized over the life of such securities.
The Company is exposed to potential credit loss in the event of
nonperformance by counterparties on interest rate cap agreements and
interest rate swaps. Nonperformance is not anticipated and, therefore, no
collateral is held or pledged. The credit risk associated with these
agreements is minimized by purchasing such agreements from investment-grade
counterparties.
5. Income Taxes
Income tax expense is summarized as follows (in thousands):
Year Ended December 31 1996 1995 1994
Current $52,369 $37,746 $18,118
Deferred (5,147) 585 13,933
$47,222 $38,331 $32,051
A reconciliation of income tax expense with expected federal income tax
expense computed at the applicable federal income tax rate of 35% is as
follows (in thousands):
Year Ended December 31 1996 1995 1994
Expected income tax expense $ 48,246 $ 37,779 $ 33,347
Increase (decrease) in income
taxes resulting from:
Nontaxable investment income (1,216) (1,737) (2,099)
Amortization of goodwill 396 396 396
Other, net (204) 1,893 407
Income tax expense $ 47,222 $ 38,331 $ 32,051
The components of deferred federal income taxes are as follows (in
thousands):
December 31 1996 1995
Deferred tax assets:
Policy liabilities $171,327 $140,971
Guaranty fund expense 6,260 7,679
Deferred gain on interest rate swaps -- 312
Net operating loss carryforwards 2,667 3,041
Other 3,915 1,039
Total deferred tax assets 184,169 153,042
Deferred tax liabilities:
Deferred policy acquisition costs (63,076) (44,468)
Value of insurance in force and
intangible assets (20,539) (7,152)
Excess of book over tax basis of
investments (118,403) (127,991)
Separate account asset (4,557) (2,539)
Deferred loss on interest rate swaps (2,765) (3,715)
Other (576) --
Total deferred tax liabilities (209,916) (185,865)
Net deferred tax liability $ (25,747) $ (32,823)
As of December 31, 1996, the Company had approximately $7.6 million of
purchased net operating loss carryforwards (relating to the acquisition of
Independence Life). Utilization of these net operating loss carryforwards,
which expire through 2006, is limited to use against future profits. The
Company believes that it is more likely than not that it will realize the
benefit of its deferred tax assets.
Income taxes paid were $46.9 million, $44.7 million and $28.8 million in
1996, 1995 and 1994, respectively.
6. Retirement Plans
Keyport employees and certain employees of Liberty Financial are
eligible to participate in the Liberty Financial Companies, Inc. Pension
Plan (the "Plan"). It is the Company's practice to fund amounts for the
Plan sufficient to meet the minimum requirements of the Employee Retirement
Income Security Act of 1974. Additional amounts are contributed from time
to time when deemed appropriate by the Company. 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. Plan assets
consist principally of investments in certain mutual funds sponsored by an
affiliated company.
The Company also has an unfunded non-qualified Supplemental Pension Plan
("Supplemental Plan") collectively with the Plan, (the "Plans"), to replace
benefits lost due to limits imposed on Plan benefits under the Internal
Revenue Code.
The following table sets forth the Plans' funded status. Substantially
all the Plans' assets are invested in mutual funds sponsored by the
Company.
<TABLE>
<CAPTION> 1996 1995
December 31
(Dollars in thousands)
<S> <C> <C>
Actuarial present value of benefit
obligations:
Vested benefit obligations $ 7,172 $ 6,082
Accumulated benefit obligation $ 7,963 $ 6,915
Projected benefit obligation $10,559 $ 9,185
Plan assets at fair value (6,399) (5,703)
Projected benefit obligation in excess of
the Plans' assets 4,160 3,482
Unrecognized net actuarial loss (1,496) (1,740)
Prior service cost not yet recognized in
net periodic pension cost (183) (206)
Accrued pension cost $ 2,481 $ 1,536
</TABLE>
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:
<TABLE>
<CAPTION>
Year Ended December 31 1996 1995 1994
<S> <C> <C> <C>
Pension cost includes the following
components:
Service cost benefits earned during the
period $ 717 $ 541 $ 532
Interest cost on projected benefit
obligation 725 603 534
Actual return on Plan assets (732) (999) 63
Net amortization and deferred amounts 357 600 (338)
Total net periodic pension cost $1,067 $ 745 $ 791
Discount rate 7.50% 7.25% 8.25%
Rate of increase in compensation level 5.25% 5.25% 5.25%
Expected long-term rate of return on
assets 8.50% 8.50% 8.50%
</TABLE>
The Company provides various other funded and unfunded defined
contribution plans, which include savings and investment plans and
supplemental savings plans. For each of the years ended December 31, 1996,
1995 and 1994, expenses related to these defined contribution plans totaled
(in thousands) $589.7, $595.0 and $533.5, respectively.
7. Fair Value of Financial Instruments
The following discussion outlines the methodologies and assumptions used
to determine the fair value of the Company's financial instruments. The
aggregate fair value amounts presented herein do not necessarily represent
the underlying value of the Company, and accordingly, care should be
exercised in deriving conclusions about the Company's business or financial
condition based on the fair value information presented herein.
The following methods and assumptions were used by the Company in
determining fair values of financial instruments:
Fixed maturities and equity securities: Fair values for fixed
maturity securities are based on quoted market prices, where
available. For fixed maturities not actively traded, the fair
values are determined using values from independent pricing
services, or, in the case of private placements, are determined
by discounting expected future cash flows using a current market
rate applicable to the yield, credit quality, and maturity of the
securities. The fair values for equity securities are based on
quoted market prices.
Mortgage loans: The fair value of mortgage loans are
determined by discounting future cash flows to the present at
current market rates, using expected prepayment rates.
Policy loans: The carrying value of policy loans approximates
fair value.
Other invested assets, cash: The carrying value for assets
classified as other invested assets and cash in the accompanying
balance sheets approximates their fair value.
Policy liabilities: Deferred annuity contracts are assigned
fair value equal to current net surrender value. Annuitized
contracts are valued based on the present value of the future
cash flows at current pricing rates.
The fair values and carrying values of the Company's financial
instruments are as follows (in thousands):
<TABLE>
December 31 1996 1995
Carrying Fair Carrying Fair
Value Value Value Value
<S> <C> <C> <C> <C>
Assets:
Fixed maturity
securities $10,718,644 $10,718,644 $ 9,535,948 $ 9,535,948
Equity securities 35,863 35,863 25,214 25,214
Mortgage loans 67,005 73,424 74,505 79,697
Policy loans 532,793 532,793 498,326 498,326
Other invested assets 183,622 183,622 10,748 10,748
Cash and cash
equivalents 767,385 767,385 777,384 777,384
Liabilities:
Policy liabilities 11,637,528 11,127,352 10,084,392 9,650,113
</TABLE>
8. Quarterly Financial Data, in thousands (unaudited)
<TABLE>
Quarter Ended 1996 March 31 June 30 September 30 December 31
<S> <C> <C> <C> <C>
Investment income $ 187,728 $ 188,334 $ 200,253 $ 214,050
Interest credited to
policyholders (138,109) (136,161) (146,071) (152,378)
Investment spread 49,619 52,173 54,182 61,672
Net realized investment
gains (losses) 2,052 (2,487) 755 5,189
Fee income 7,769 8,006 9,015 8,744
Pretax income 30,340 29,650 34,575 43,281
Net income 19,688 19,943 22,289 28,704
</TABLE>
<TABLE>
Quarter Ended 1995 March 31 June 30 September 30 December 31
<S> <C> <C> <C> <C>
Investment income $ 183,784 $ 189,496 $ 189,652 $ 192,998
Interest credited to
policyholders (130,919) (139,226) (143,317) (142,263)
Investment spread 52,865 50,270 46,335 50,735
Net realized investment
gains (losses) (5,652) (719) 1,430 983
Fee income 7,308 7,919 7,217 7,323
Pretax income 23,348 29,452 28,395 26,746
Net income 15,370 18,675 18,251 17,314
</TABLE>
9. Statutory Information
Keyport is domiciled in Rhode Island and prepares its statutory
financial statements in accordance with accounting principles and practices
prescribed or permitted by the Department of Business Regulation of the
State of Rhode Island. Statutory surplus differs from stockholder's equity
reported in accordance with GAAP primarily because policy acquisition costs
are expensed when incurred, investment reserves and policy liabilities are
based on different assumptions, and income tax expense reflects only taxes
paid or currently payable. Keyport's statutory surplus and net income are
as follows (in thousands):
<TABLE>
Year Ended December 31 1996 1995 1994
<S> <C> <C> <C>
Statutory surplus $ 567,735 $ 535,179 $ 546,440
Statutory net income 40,237 38,264 23,385
</TABLE>
10. Transactions with Affiliated Companies
The Company reimbursed Liberty Financial and certain affiliates for
expenses incurred on its behalf for the years ended December 31, 1996, 1995
and 1994. 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 $7.8 million, $7.6 million and $7.3 million for the years ended
December 31, 1996, 1995 and 1994 , respectively. In addition, certain
affiliated companies distribute the Company's products and were paid $6.4
million, $7.6 million and $15.3 million by the Company for the years ended
December 31, 1996, 1995, and 1994, respectively.
Keyport has mortgage notes in the original principal amount of $100.0
million on properties owned by certain indirect subsidiaries of Liberty
Mutual. The notes were purchased for their face value. Liberty Mutual has
agreed to provide credit support to the obligors under these notes with
respect to certain payments of principal and interest thereon. As of
December 31, 1996 and 1995, the amounts outstanding were $39.5 million.
Dividend payments to Liberty Financial from the Company are governed
by insurance laws which restrict the maximum amount of dividends that may
be paid without prior approval of the Department of Business Regulation of
the State of Rhode Island. As of December 31, 1996, the maximum amount of
dividends (based on statutory surplus and statutory net gains from
operations) which may be paid by Keyport was approximately $42.5 million.
11. Commitments and Contingencies
Leases: The Company leases data processing equipment, furniture and
certain office facilities from others under operating leases expiring in
various years through 2001. Rental expense (in thousands) amounted to
$3,213, $3,221 and $3,011 for the years ended December 31, 1996, 1995 and
1994, respectively. For each of the next five years, and in the aggregate,
as of December 31, 1996, the following are the minimum future rental
payments under noncancelable operating leases having remaining terms in
excess of one year (in thousands):
Year Payments
1997 $ 2,641
1998 2,992
1999 2,815
2000 2,731
2001 2,715
$ 13,894
Legal Matters: The Company is involved at various times in litigation
common to its business. In the opinion of management, provisions made for
potential losses are adequate and the resolution of any such litigation is
not expected to have a material adverse effect on the Company's financial
condition or its results of operations.
Regulatory Matters: 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 1996, 1995 and 1994, Keyport was assessed $10.0 million, $8.1 million,
and $7.7 million, respectively. During 1996, 1995 and 1994, Keyport
recorded $1.0 million, $2.0 million, and $7.2 million respectively, of
provisions for state guaranty fund association expense. At December 31,
1996 and 1995, the reserve for such assessments was $12.9 million and $21.9
million, respectively.
Schedule I
KEYPORT LIFE INSURANCE COMPANY
SUMMARY OF INVESTMENTS
(in thousands)
<TABLE>
<CAPTION>
December 31, 1996
Balance
Amortized Sheet
Type of investment Cost Fair Value Amount
<S> <C> <C> <C>
Fixed Maturities:
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $ 1,701,402 $ 1,734,277 $ 1,734,277
Obligations of states and
political subdivisions 23,895 24,228 24,228
Foreign governments 246,339 257,503 257,503
Corporate and other
securities 6,115,775 6,265,990 6,265,990
Mortgage backed securities 2,413,020 2,436,646 2,436,646
Total fixed maturities 10,500,431 10,718,644 10,718,644
Equity securities:
Common stocks:
Industrial, miscellaneous
and all other 19,412 35,863 35,863
Mortgage loans on real estate1 67,005 73,424 67,005
Policy loans 532,793 532,793 532,793
Other long term investments 183,622 183,622 183,622
Total investments $11,303,263 $11,544,346 $11,537,927
</TABLE>
1 Includes mortgage notes relating to certain investment property owned
by Liberty Mutual in the amount of $39,500 at December 31, 1996.
<PAGE>
Schedule III
KEYPORT LIFE INSURANCE COMPANY
SUPPLEMENTARY INSURANCE INFORMATION
(in thousands)
Three Years Ended December 31, 1996
<TABLE>
Column A Column B Column C Column D Column E Column F
Deferred Policyholder Unearned Policy Insurance
policy account premiums contract revenues
acquisition balances claims
costs and future and other
policy policyholders'
benefits funds
December 31, 1996
<S> <C> <C> <C> <C> <C>
Interest sensitive
products $250,355 $11,610,418 NA $27,110 $30,921
December 31, 1995
Interest sensitive
products $179,672 $10,063,312 NA $21,080 $27,926
December 31, 1994
Interest sensitive
products $439,232 $ 9,325,987 NA $18,057 $24,040
</TABLE>
<TABLE>
Column A Column G Column H Column I Column J Column K
Net Interest Amortization Other Premiums
investment credited of operating written
income to deferred expenses
policyholders policy
and acquisition
policy costs
benefits
and
claims
December 31, 1996
<S> <C> <C> <C> <C> <C>
Interest sensitive
products $790,365 $576,196 $60,225 $55,141 NA
December 31, 1995
Interest sensitive
products $755,930 $560,173 $58,541 $55,084 NA
December 31, 1994
Interest sensitive
products $689,575 $486,764 $52,174 $72,414 NA
</TABLE>
KEYPORT LIFE INSURANCE COMPANY
VALUATION AND QUALIFYING ACCOUNTS
Three Years Ended December 31, 1996
(in thousands)
<TABLE>
<CAPTION> Balance at Balance
Beginning at End
of Year Additions Deductions of Year
<S> <C> <C> <C>
Years Ended:
December 31, 1996
Fixed maturities:
Investment valuation
reserve $ -- $ -- $ -- $ --
December 31, 1995
Fixed maturities:
Investment valuation
reserve $ -- $ -- $ -- $ --
December 31, 1994(1)
Fixed maturities:
Investment valuation
reserve $33,516 $ -- $33,516 $ --
</TABLE>
1 Investment valuation reserve balance was eliminated upon adoption of
SFAS No. 115 as of January 1, 1994.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston and the
Commonwealth of Massachusetts on March 31, 1997.
Keyport Life Insurance Company
By: /s/ John W. Rosensteel
---------------------------
John W. Rosensteel
President and
Chief Executive Officer
Signature Title Date
/s/Kenneth R. Leibler* Chairman of the Board March 31, 1997
Kenneth R. Leibler
/s/John W. Rosensteel President and Chief March 31, 1997
John W. Rosensteel Executive Officer
/s/Paul H. LeFevre, Jr.* Senior Vice President March 31, 1997
Paul H. LeFevre, Jr. (Principal Financial Officer)
/s/Jeffery J. Whitehead Vice President and Treasurer March 31, 1997
Jeffery J. Whitehead (Principal Accounting Officer)
/s/F. Remington Ballou* Director March 31, 1997
F. Remington Ballou
/s/Frederick Lippit* Director and Assistant March 31, 1997
Frederick Lippit Secretary
/s/Robert C. Nyman* Director March 31, 1997
Robert C. Nyman
* John W. Rosensteel has signed this document on the indicated date on behalf
of each of the above mentioned Directors and Officers of the Registrant pursuant
to powers of attorney duly executed by such persons and included as part of
Exhibit 24 in the Registration Statement to Form S-1 (file No. 333-1783)filed on
or about March 16, 1996.
<PAGE>
Exhibit Index
Exhibit
Number Description Page
1 Subsidiaries of the Company 24
2(a) Articles of Incorporation--Incorporated by Reference
to Registration Statement on Form N-4 filed on
February 16, 1996 (File No. 333-01043; 811-07543)
2(b) By-laws--Incorporated by Reference to Registration
Statement on Form N-4 filed on February 16, 1996
(File No. 333-01043; 811-07543)
2(c) Powers of Attorney are incorporated by reference to
Registration Statement (File No. 333-1783) filed on
or about March 16, 1996.
10.1 Coinsurance Agreement by and between Fidelity and 25
Guaranty Life Insurance Company and Keyport Life
Insurance Company
<PAGE>
Exhibit I
KEYPORT LIFE INSURANCE COMPANY
SUBSIDIARIES OF THE COMPANY
Independence Life & Annuity Company
Keyport Advisory Services Corporation
Keyport Financial Services Corp.
EXECUTION COPY
COINSURANCE AGREEMENT
by and between
FIDELITY AND GUARANTY LIFE INSURANCE COMPANY
and
KEYPORT LIFE INSURANCE COMPANY
Dated as of July 26, 1996
TABLE OF CONTENTS
Page
ARTICLE I DEFINITIONS . . . . . . . . . . . . . . . . . . 1
ARTICLE II REINSURANCE COVERAGE. . . . . . . . . . . . . . 7
ARTICLE III GENERAL PROVISIONS. . . . . . . . . . . . . . . 8
ARTICLE IV REINSURANCE PREMIUMS; CEDING COMMISSION . . . . 13
ARTICLE V RESERVES. . . . . . . . . . . . . . . . . . . . 15
ARTICLE VI EXPENSE ALLOWANCE . . . . . . . . . . . . . . . 15
ARTICLE VII DEATH BENEFITS, ANNUITY PAYMENTS AND OTHER
PAYMENTS. . . . . . . . . . . . . . . . . . . . 16
ARTICLE VIII ACCOUNTING AND SETTLEMENT . . . . . . . . . . . 19
ARTICLE IX DURATION, RECAPTURE AND TERMINATION . . . . . . 22
ARTICLE X INSOLVENCY. . . . . . . . . . . . . . . . . . . 25
ARTICLE XI ARBITRATION . . . . . . . . . . . . . . . . . . 26
ARTICLE XII SECURITY. . . . . . . . . . . . . . . . . . . . 28
ARTICLE XIII REPRESENTATIONS, WARRANTIES AND COVENANTS
OF THE COMPANY. . . . . . . . . . . . . . . . . 33
ARTICLE XIV REPRESENTATIONS, WARRANTIES AND COVENANTS
OF THE REINSURER. . . . . . . . . . . . . . . . 36
ARTICLE XV CONDITIONS TO CLOSING . . . . . . . . . . . . . 39
ARTICLE XVI MISCELLANEOUS PROVISIONS. . . . . . . . . . . . 41
SCHEDULES
SCHEDULE A - REINSURED SPDAs
SCHEDULE B - QUARTERLY PERIOD REINSURANCE REPORTS
SCHEDULE C - ANNUAL REINSURANCE REPORTS
SCHEDULE D - POLICYHOLDER SERVICES TO BE PROVIDED
SCHEDULE E - CONSERVATION AND COMMISSION PAYMENT SERVICES TO BE
PROVIDED AND ASSOCIATED FEES
SCHEDULE F - LIST OF AGENCY AND DISTRIBUTION AGREEMENTS
SCHEDULE G - CONSENTS AND APPROVALS REQUIRED BY THE COMPANY
SCHEDULE H - CONSENTS AND APPROVALS REQUIRED BY THE REINSURER
SCHEDULE I - FORM OF OPINION OF SENIOR VICE PRESIDENT AND
GENERAL COUNSEL FOR THE REINSURER
SCHEDULE J - JOINT ELECTION UNDER IRC REGULATION 1.848-2(g)(8)
COINSURANCE AGREEMENT
THIS COINSURANCE AGREEMENT (this "Agreement"), dated
as of July 26, 1996, is made and entered into by and between
FIDELITY AND GUARANTY LIFE INSURANCE COMPANY, a life insurance
company organized under the laws of the State of Maryland (the
"Company"), and KEYPORT LIFE INSURANCE COMPANY, a life insurance
company organized under the laws of the State of Rhode Island
(the "Reinsurer").
WHEREAS, the Company has agreed to cede to the
Reinsurer, on a coinsurance basis, the Reinsured SPDAs (as
defined below), and the Reinsurer has agreed to reinsure all
liabilities and obligations of the Company arising under the
Reinsured SPDAs, subject to the exclusions set forth in
Section 2.03 below.
NOW, THEREFORE, in consideration of the mutual
covenants and promises and upon the terms and conditions set
forth herein, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
As used in this Agreement, the following terms shall
have the following meanings (definitions are applicable to both
the singular and the plural forms of each term defined in this
Article):
"Account Values" means the account value, as defined in the
Reinsured SPDAs, which is not reduced for surrender charges.
"Accounting Period" means a calendar quarter, except that the
initial Accounting Period shall be the period commencing with
the Effective Date and ending with the last day of the then
current calendar quarter, and the final Accounting Period shall
be the period commencing with the first day of the calendar
quarter that includes the Termination Date and ending on the
Termination Date.
"Act" shall have the meaning specified in Section 13.07(b).
"Annual Report" means the report required to be prepared in
accordance with Section 8.03 and providing the data as shown on
Schedule C.
"Benefits" shall have the meaning specified in Section 7.01.
"Blended Rate" means the percentage rate equal to the sum of (i)
two-thirds of the one year Treasury Note rate as of the close of
business on the Business Day immediately preceding the Closing
Date plus (ii) one-third of the three year Treasury Note rate as
of the close of business on the Business Day immediately
preceding the Closing Date.
"Business Day" means any day that is not a Saturday or a Sunday
or a day on which banks in the State of New York are authorized
or required by law to close.
"Cash Equivalents" means, as of any particular date, money
market funds, marketable obligations issued or guaranteed by the
United States Government, certificates of deposit, bankers'
acceptances and other similar liquid investments, in each case,
with a maturity date of not more than 90 days from the date on
which any such instrument is transferred pursuant to the terms
of this Agreement, the market value of which on the date of
transfer will be counted as equivalent to cash for purposes of
satisfying the aggregate amount of cash and Cash Equivalents
required to be transferred under this Agreement.
"Ceding Commission" shall have the meaning specified in Section
4.02.
"Closing" means the closing of the transactions under this
Agreement on the Closing Date.
"Closing Date" means the date which is three Business Days
following the receipt of all required governmental and
regulatory consents and approvals, including the expiration of
any applicable waiting periods, in connection with the
reinsurance of the Reinsured SPDAs, which date shall not be
earlier than August 1, 1996 or later than October 31, 1996.
"Commissions and Expenses" means (i) all sales commissions,
production bonuses or other payments in cash or kind payable to
duly licensed insurance agents or other persons with respect to
any Reinsured SPDAs, whether issued by the Company prior to the
Effective Date or issued by the Company, with the consent of the
Reinsurer, on or subsequent to the Effective Date, (ii) an
administration services fee of $2.00 per month per Reinsured
SPDA in force at the beginning of each month during the term of
this Agreement for providing the policyholder services listed on
Schedule D with respect to the Reinsured SPDAs, (iii) the fees
listed on Schedule E for providing the conservation and
commission payment services included therein, and (iv) all
direct expenses incurred in connection with the Reinsured SPDAs,
including, but not limited to (a) guaranty fund assessments
relating to premiums written on or subsequent to the Effective
Date, (b) premium or other taxes and (c) any charges and
assessments imposed directly on or with respect to the Reinsured
SPDAs.
"Daily Interest Amount" shall have the meaning specified in
Section 7.01(b).
"Effective Date" shall have the meaning specified in
Section 2.01.
"Endorsements" means any endorsements to the SPDAs in force on
the Effective Date and issued pursuant to an offer from the
Company which has been accepted by an owner of a Reinsured SPDA
providing for a new interest rate guarantee period and the
reimposition of surrender charges upon termination of the
initial six-year surrender charge period.
"Extracontractual Liabilities" means all liabilities for
consequential, exemplary, punitive or similar damages which
relate to or arise in connection with any alleged or actual act,
error or omission by the Company, its directors, officers,
employees, agents or any of the Company's affiliates, whether
intentional or otherwise, or from any alleged or actual reckless
conduct or bad faith by the Company, its directors, officers,
employees, agents or any of the Company's affiliates, in
connection with the handling of any claim under any of the
Reinsured SPDAs or in connection with the issuance, delivery,
cancellation or administration of any of the Reinsured SPDAs.
"First Commission Rate" means the percentage rate equal to the
sum of (i) 2.6 percent plus (ii) the product of (a) 1.4 and
(b) the difference between (1) the Blended Rate and (2) 6.06
percent.
"Governmental Authority" means any foreign, federal, state,
local or other court, arbitrator, administrative agency,
commission or division, insurance or securities regulatory or
self-regulatory body or securities or commodities exchange.
"Initial Reinsurance Premium" shall have the meaning specified
in Section 4.01.
"Investment Assets" means the assets that are transferred to the
Reinsurer in connection with the Initial Reinsurance Premium.
"NAIC" means the National Association of Insurance
Commissioners.
"Qualified Financial Institution" shall have the meaning
specified in Section 09.30.97.08 of the Code of Maryland
Regulations.
"Quarterly Report" means the report required to be prepared in
accordance with Section 8.02 and providing the data as shown on
Schedule B.
"Quarterly Settlement" means the net amount due and payable to
either party with respect to any Accounting Period.
"Recapture Event" shall have the meaning specified in
Section 9.03.
"Reinsured SPDAs" means (i) the SPDAs, including any
Endorsements thereto, and (ii) any single premium deferred
annuity contracts replacing SPDAs and any endorsements to SPDAs
issued by the Company on or subsequent to the Effective Date
with the consent of the Reinsurer. Reinsured SPDAs shall not
include Retained Asset Account Funds in existence on the
Effective Date.
"Reserves" means the statutory reserves established by the
Company with respect to the liabilities arising under the
Reinsured SPDAs, including, but not limited to, excess interest
reserves, claim reserves and other statutory liabilities
required to be reported by the Company on its NAIC Annual
Statement Blank filed with the State of Maryland.
"Retained Asset Account Funds" means death benefit funds on
deposit with the Company but not yet paid out or annuitized
under a settlement option at the request of the beneficiary or
the estate, with regard to the Reinsured SPDAs.
"Second Commission Rate" means the percentage rate equal to the
sum of (i) 1.8 percent plus (ii) the product of (a) 1.4 and
(b) the difference between (1) the Blended Rate and (2) 6.06
percent.
"Short Term Rate" means the sum of (i) the Blended Rate and
(ii) 1.0 percent.
"SPDAs" means the single premium deferred annuity contracts in
force on the Effective Date and issued by the Company on the
policy forms listed on Schedule A attached hereto.
"Terminal Accounting and Settlement" shall have the meaning
specified in Section 9.07.
"Termination Date" means the date on which any complete
termination of this Agreement, as provided in Article IX, is
effective, either as a result of an event described in
Article IX, or as designated by the terminating party or
parties.
"Termination Report" means the report required to be prepared in
accordance with Section 9.08 and providing the calculations for
the Terminal Accounting and Settlement.
"Third Commission Rate" means the percentage rate equal to the
sum of (i) 3.0 percent plus (ii) the product of (a) 1.4 and
(b) the difference between (1) the Blended Rate and (2) 6.06
percent.
"Trust" or "Trust Account" shall mean the Trust or Trust Account
established pursuant to Article XII.
ARTICLE II
REINSURANCE COVERAGE
2.01. Coverage. Upon the terms and subject to the
conditions and other provisions of this Agreement and any
required governmental and regulatory consents and approvals,
effective as of 12:01 a.m., Eastern Time, on the Closing Date
or, if the Closing Date is not the first day of the month, then
such date to be the first day of the month in which the Closing
Date occurs (the "Effective Date"), the Company hereby cedes to
the Reinsurer, and the Reinsurer hereby assumes, on a
coinsurance basis, all liabilities and obligations of the
Company arising under the Reinsured SPDAs, subject to the
exclusions set forth in Section 2.03. The liability of the
Reinsurer with respect to the Reinsured SPDAs shall begin on the
Effective Date.
2.02. Conditions. The reinsurance hereunder is subject
to the same limitations, terms and conditions as the Reinsured
SPDAs, except as otherwise provided in this Agreement.
2.03. Exclusions. This Agreement does not apply to and
specifically excludes from coverage hereunder:
(a) any insurance policy or annuity contract
issued by the Company other than the
Reinsured SPDAs; or
(b) any Extracontractual Liabilities.
2.04. Plan of Reinsurance. This reinsurance shall be
on a one hundred percent (100%) coinsurance basis.
2.05. Retrocession. The Reinsurer retains the right to
retrocede all or any portion of the risk on any Reinsured SPDA.
2.06. Other Reinsurance. During the term of this
Agreement, the Company shall not, without the prior written
consent of the Reinsurer, enter into any reinsurance agreement
of any type, other than this Agreement, with respect to the
Reinsured SPDAs.
ARTICLE III
GENERAL PROVISIONS
3.01. Administration and Expenses. The Company or its
designated administrator shall continue to perform or have
performed all policyholder services as more fully described on
Schedule D and the conservation and commission payment services
with respect to the Reinsured SPDAs as more fully described on
Schedule E. The Reinsurer shall pay all administration and
accounting expenses and other expenses related to maintenance of
the Reinsured SPDAs, as part of Commissions and Expenses payable
pursuant to the provisions of Section 6.01 of this Agreement.
3.02. Voluntary Contract Changes or Reserve Assumption
Changes. The Company, on its own initiative, shall not without
the prior consent of the Reinsurer change (i) the terms and
conditions of any Reinsured SPDAs, or (ii) the assumptions,
including the statutory reserve accumulation rate assumption and
the interpretation of NAIC regulations and guidelines relating
to the calculation of statutory reserves, used by the Company to
establish the Reserves with respect to the Reinsured SPDAs. The
Reinsurer shall share, according to the percentage specified in
Section 2.04 of this Agreement, in any contract changes or
Reserve changes required by any regulatory authority having
jurisdiction over the Company in the ordinary course of
exercising its powers or otherwise required by law. In the
event of an increase in the Reserves directly caused by changes
in the Company's interpretation, on its own initiative, of NAIC
regulations and guidelines relating to the calculation of the
Reserves, the Company and the Reinsurer shall attempt in good
faith to determine the cost of holding the additional amount of
Reserves required by such changes; provided, however, that if
the Company and the Reinsurer are unable to resolve any
disagreement with respect to such cost, then the matter shall be
referred to arbitration pursuant to the terms of Article XI, at
the initiative of either party.
3.03. Inspection.
(a) Subject to reasonable advance notice to the Company,
the Reinsurer or its designated representative may inspect, at
the offices of the Company or its designated representative or
wherever such records are located, any and all books, documents
or records of the Company reasonably relating to the Reinsured
SPDAs during normal business hours for such period as this
Agreement is in effect or for as long thereafter as the Company
seeks performance by the Reinsurer pursuant to the terms of this
Agreement. While performing any such inspection, the Reinsurer
or its designated representative shall use its best efforts to
minimize any disruption to the Company's normal business
operations. Upon the Reinsurer's reasonable request, copies of
such records shall be furnished to the Reinsurer, at the expense
of the Reinsurer. The information obtained by the Reinsurer
shall be treated as confidential material and proprietary to the
Company and shall be used by the Reinsurer only for purposes
relating to reinsurance of the Reinsured SPDAs under this
Agreement. The Reinsurer's rights under this Section shall
survive termination of this Agreement.
(b) Subject to reasonable notice to the Reinsurer, the
Company or its designated representative may inspect, at the
offices of the Reinsurer or its designated representative or
wherever such records are located, any and all books, documents,
or records of the Reinsurer reasonably relating to the Reinsured
SPDAs during normal business hours for such period as this
Agreement is in effect or for as long thereafter as Reinsurer
seeks performance by the Company pursuant to the terms of this
Agreement. While performing any such inspection, the Company or
its designated representative shall use its best efforts to
minimize any disruption to the Reinsurer's normal business
operations. Upon the Company's reasonable request, copies of
such records shall be furnished to the Company, at the expense
of the Company. The information obtained by the Company shall
be treated as confidential material and proprietary to the
Reinsurer and shall be used by the Company only for purposes
relating to reinsurance of the Reinsured SPDAs under this
Agreement. The Company's rights under this Section shall
survive termination of this Agreement.
3.04. Misunderstandings and Oversights. If any delay,
omission, error or failure to pay amounts due or to perform any
other act required by this Agreement is unintentional and caused
by misunderstanding or oversight, the Company and the Reinsurer
will adjust the situation to what it would have been had the
misunderstanding or oversight not occurred and the reinsurance
provided hereunder shall not be invalidated. The party first
discovering such misunderstanding or oversight, or act resulting
from the misunderstanding or oversight, will notify the other
party in writing promptly upon discovery thereof, and the
parties shall act to correct such misunderstanding or oversight
within twenty (20) Business Days of receipt of such notice.
However, this Section shall not be construed as a waiver by
either party of its right to enforce strictly the terms of this
Agreement.
3.05. Reinstatements. If a Reinsured SPDA that is or
has been reduced, terminated, or lapsed is reinstated while this
Agreement is in force, the reinsurance for such Reinsured SPDA
shall be reinstated automatically to the amount that would be in
force if the Reinsured SPDA had not been reduced, terminated, or
lapsed. The Company will pay to the Reinsurer all amounts
received or charged by the Company in connection with the
reinstatement.
3.06. Setoff and Recoupment. Any debts or credits,
matured or unmatured, liquidated or unliquidated, regardless of
when they arose or were incurred, in favor of or against either
the Company or the Reinsurer with respect to this Agreement are
deemed mutual debts or credits, as the case may be, and shall be
setoff from any amounts due to the Company or the Reinsurer
hereunder, as the case may be, and only the net balance shall be
allowed or paid. This setoff provision (to the extent permitted
by law) shall not be modified or reconstrued due to the
insolvency, liquidation, rehabilitation, conservatorship, or
receivership of either party.
3.07. Payments. All payments made pursuant to this
Agreement (other than the transfer of Investment Assets in
connection with the Initial Reinsurance Premium described in
Section 4.01 of this Agreement) shall be in cash or Cash
Equivalents and shall be made in immediately available funds or
assets acceptable to the Company (at market value) as agreed by
the parties. If a transfer of assets is agreed upon, the party
making the transfer shall deliver the assets to the other party
along with such deeds, bills of sale, endorsements, assignments
and other good and sufficient instruments of conveyance and
transfer reasonably acceptable to the parties as shall be
effective to vest in the party receiving the assets all of the
right, title and interest of the transferring party in and to
the assets.
3.08. Age, Sex and Other Adjustments. If the Company's
liability under any of the Reinsured SPDAs is changed because of
a misstatement of age or sex or any other material facts, the
Reinsurer shall share, according to the percentage specified in
Section 2.04 of this Agreement, in any such change.
ARTICLE IV
REINSURANCE PREMIUMS; CEDING COMMISSION
4.01. Initial Reinsurance Premium. As consideration
for the assumption by the Reinsurer of the liabilities under
this Agreement, on the Closing Date, the Company shall transfer
to the Reinsurer (i) Investment Assets with an aggregate fair
market value to the Company equal to one hundred percent (100%)
of the Reserves with respect to the Reinsured SPDAs as of the
close of business on the Business Day immediately preceding the
Effective Date plus (ii) an amount equal to the Short Term Rate
per annum on such Investment Assets from the Effective Date
until the close of business on the Business Day immediately
preceding the Closing Date (the "Initial Reinsurance Premium").
The Company shall deliver to the Reinsurer possession of the
Investment Assets and such deeds, bills of sale, endorsements,
assignments and other good and sufficient instruments of
conveyance and transfer in form and substance reasonably
acceptable to the parties as shall be effective to vest in the
Reinsurer all of the right, title and interest of the Company in
and to the Investment Assets. Payment of the Initial
Reinsurance Premium shall be a condition precedent of
reinsurance coverage hereunder.
4.02. Ceding Commission. On the Closing Date, the
Reinsurer shall pay a ceding commission (the "Ceding
Commission") to the Company in an amount equal to the sum of:
(i) the product of (a) the Reserves as of the close of
business on the Business Day immediately preceding the
Effective Date allocated to the SPDAs with sixth year
anniversary dates on or prior to the date which is 45 days
prior to the Effective Date and (b) the First Commission
Rate;
(ii) the product of (a) the Reserves as of the close of
business on the Business Day immediately preceding the
Effective Date allocated to the SPDAs with sixth year
anniversary dates subsequent to the date which is 45 days
prior to the Effective Date for which Endorsements have not
been issued and (b) the Second Commission Rate;
(iii) the product of (a) the Reserves as of the close of
business on the Business Day immediately preceding the
Effective Date allocated to the SPDAs for which
Endorsements have been issued prior to the Effective Date
and (b) the Third Commission Rate; and
(iv) an amount equal to the Short Term Rate per annum on
the sum of the amounts calculated pursuant to subsections
(i), (ii) and (iii) above from the Effective Date until the
close of business on the Business Day immediately preceding
the Closing Date.
Such amount shall be paid in cash or Cash Equivalents by the
Reinsurer and shall be netted against the Initial Reinsurance
Premium in accordance with Section 3.06.
ARTICLE V
RESERVES
5.01. Reserves and Reserve Credits. The Reinsurer
shall establish and maintain adequate Reserves with respect to
the Reinsured SPDAs as necessary to enable the Company to take
full reinsurance reserve credit contemplated by this Agreement
on its statutory balance sheet filed with the Insurance
Department of all states in which the Company files its annual
statement.
ARTICLE VI
EXPENSE ALLOWANCE
6.01. Expense Allowance. The Reinsurer shall pay the
Company, in accordance with Section 8.01(a), an expense
allowance equal to 100.14% of the Commissions and Expenses
incurred and paid by the Company during the term of this
Agreement with respect to the Reinsured SPDAs; provided,
however, the Reinsurer expressly agrees that the Company's right
to receive reimbursement for guaranty fund assessments as part
of Commissions and Expenses shall survive the termination of
this Agreement.
ARTICLE VII
DEATH BENEFITS, ANNUITY PAYMENTS AND OTHER PAYMENTS
7.01. Death Benefits, Annuity Payments and Surrender or
Withdrawal Payments.
(a) The Reinsurer shall reimburse the Company, in
accordance with Sections 7.01(b) and 8.01(b), for an amount
equal to 100.14% of the sum of all (i) death benefits, (ii)
surrender or withdrawal payments and (iii) periodic payments
under annuity settlement options elected by the owner, and paid
by the Company, with respect to Reinsured SPDAs that become due
on or after the Effective Date (such death benefits and other
payments referred to in the foregoing clause (i), (ii) and (iii)
are referred to collectively as "Benefits"). The reimbursement
for Benefits shall be net of surrender charges pursuant to the
terms of the relevant Reinsured SPDAs.
(b) On the Closing Date, the Reinsurer shall reimburse the
Company for an amount equal to the sum of:
(i) 100.14% of any Benefits paid by the Company in respect
of Reinsured SPDAs from the Effective Date until the close
of business on the Business Day immediately preceding the
Closing Date; and
(ii) an amount equal to the sum of the Daily Interest
Amount for each day from and including the Effective Date
until the close of business on the Business Day immediately
preceding the Closing Date. For purposes of this Section,
the Daily Interest Amount means the product of (a) the
cumulative amount of Benefits paid as of the close of
business on each day on or subsequent to the Effective Date
and (b) the Short Term Rate per annum.
The amount calculated pursuant to this Section 7.01(b) shall be
paid in cash or Cash Equivalents by the Reinsurer and shall be
netted against the Initial Reinsurance Premium in accordance
with Section 3.06.
7.02. Liability and Payment. Unless the Reinsurer has
made the election provided in Section 7.03 to participate in the
contest, compromise or litigation of a claim, the Reinsurer will
accept the decision of the Company on payment of a claim on a
Reinsured SPDA. The Reinsurer will pay claims (including
expenses incurred in connection with such claims) for Benefits
(other than for the payment of periodic annuity payments if
elected by the owner or annuitant) attributable to Reinsured
SPDAs in a lump sum to the Company without regard to the form of
claim settlement payable by the Company.
7.03. Contested Claims. The Company will provide
notice to the Reinsurer of its intention to contest, compromise,
or litigate a claim (including interpleader actions) with
respect to a Reinsured SPDA. Within ten (10) Business Days
after receipt of such notice, the Reinsurer may elect to
participate in contesting a claim attributable to a Reinsured
SPDA by submitting a notice of such election to the Company.
The Reinsurer shall be deemed to have elected to not participate
in such contest if it fails to make such election within ten
(10) Business Days. If the Reinsurer elects not to participate
in such contest, it may discharge its liability by payment to
the Company of the lesser of the full amount of the claim or the
full amount of the Reinsured SPDA relating to such claim. In no
event shall the Reinsurer indemnify the Company for any
Extracontractual Liabilities arising with respect to any
Reinsured SPDA, unless such Extracontractual Liabilities result
from an action caused, or specifically consented to, by the
Reinsurer; provided, however, that the Reinsurer's election to
participate in the contest, compromise or litigation of a claim
with respect to a Reinsured SPDA shall not automatically be
deemed to be an action specifically consented to by the
Reinsurer for purposes of the immediately preceding clause. The
Company and the Reinsurer agree to cooperate in the prosecution
of any claim contest.
ARTICLE VIII
ACCOUNTING AND SETTLEMENT
8.01. Amounts Due the Reinsurer or the Company.
(a) The payments required to be made under Section 6.01
shall be paid in cash or Cash Equivalents and shall be made
monthly by wire transfer of funds to an account designated by
the Company by 11 a.m. on the second Business Day following the
end of each month with respect to the Commissions and Expenses
incurred as of the close of business on the last day of each
month (or partial month) during the term of this Agreement;
provided, that the Company notifies the Reinsurer by 2 p.m. on
the first Business Day following the end of each month of the
amounts due from the Reinsurer with respect to such month.
(b) The payments required to be made under Section 7.01
(other than the payment on the Closing Date pursuant to Section
7.01(b)) shall be paid in cash or Cash Equivalents and shall be
made weekly by wire transfer of funds to an account designated
by the Company by 11 a.m. on each Thursday following the Closing
Date with respect to the Benefits paid as of the close of
business on the second Business Day next preceding such
Thursday; provided, that the Company notifies the Reinsurer by
2 p.m. on the Business Day prior to such Thursday of the amounts
due from the Reinsurer with respect to such week.
(c) If amounts due to be paid by the Reinsurer to the
Company pursuant to Section 8.01(a) or 8.01(b) above cannot be
determined at such dates on an exact basis, such payments may be
determined on an estimated basis, and any adjustments
subsequently required to reflect actual data shall be made on
the weekly or monthly payment date, as applicable, following the
date that such actual data is available.
(d) Except as otherwise specifically provided herein, all
other amounts due to be paid to either the Reinsurer or the
Company under this Agreement shall be determined on a net basis,
giving full effect to Section 3.06 hereof, as of the last day of
each Accounting Period. Any net amount due from the Company to
the Reinsurer shall be paid in cash or Cash Equivalents no later
than the day on which the Quarterly Report showing such net
amount, as described in Section 8.02, is due. Any net amount
due from the Reinsurer to the Company shall be paid no later
than ten (10) Business Days following the receipt of such
Quarterly Report from the Company. If amounts due to be paid
cannot be determined at such dates on an exact basis, such
payments may be determined on an estimated basis, and any
adjustments subsequently required to reflect actual data shall
be made at the date upon which any amended report, based on
actual data, is due to be provided pursuant to Section 8.04.
8.02. Quarterly Reports. Within ten (10) Business Days
of the end of each Accounting Period the Company shall supply
the Reinsurer with a report that shall provide the data required
in Schedule B (the "Quarterly Report"), which shall show the net
amount due, if any, by the Company or the Reinsurer, as
appropriate.
8.03. Annual Reports. Within twenty (20) Business Days
after the end of each calendar year the Company shall supply the
Reinsurer with a report that shall provide the data required in
Schedule C (the "Annual Report").
8.04. Best Efforts to Supply Actual Data. In preparing
all reports required in this Agreement, the Company and the
Reinsurer shall make their best efforts to supply the actual
data. If the actual data cannot be supplied with the
appropriate report, the Company shall produce best estimates,
and shall provide amended reports based on actual data no more
than twenty (20) Business Days after such report was originally
due.
8.05. Tax Reserves. In connection with the Annual
Report described in Section 8.03, the Company shall supply the
Reinsurer with information with respect to tax reserves relating
to the Reinsured SPDAs.
8.06. Interest on Delayed Payments. Should any payment
due to either the Reinsurer or the Company be delayed, such
delayed payment (including any amount constituting a difference
between an estimated and actual amount, as described in Section
8.01, shall accrue interest for the period that payment is
overdue at an interest rate per annum (rounded upwards, if
necessary, to the next 1/16 of 1%) at which dollar deposits
approximately equal in amount to the overdue payments hereunder
for a comparable interest period are offered by the principal
London office of Citibank, N.A. in immediately available funds
in the London Interbank Market at approximately 11 a.m., London
time, two Business Days prior to the commencement of such
interest period; each change in such interest rate shall be
effective on the date such change is announced as effective.
ARTICLE IX
DURATION, RECAPTURE AND TERMINATION
9.01. Duration. Except as otherwise provided herein,
this Agreement shall be unlimited in duration.
9.02. Reinsurer's Liability. The Reinsurer's liability
with respect to any Reinsured SPDA will terminate on the
earliest of: (i) the date the Reinsured SPDA is recaptured;
(ii) the date the Company's liability on such Reinsured SPDA is
terminated; or (iii) the date this Agreement is terminated. In
no event should any interpretation of this Section 9.02 imply a
unilateral right of the Reinsurer to terminate this Agreement.
9.03. Termination Due to Recapture. The Company shall
have the right, on five (5) Business Days' written notice to the
Reinsurer (the "Recapture Election Notice"), to terminate this
Agreement and recapture the Reinsured SPDAs in full, such
recapture and termination to be effective as of the next
Business Day following the end of such notice period, in the
event that (i) the Standard & Poor's Corporation Claims-Paying
Ability rating of the Reinsurer becomes less than BBB- (or other
equivalent rating used by Standard & Poor's Corporation) or the
Moody's Investors Service, Inc. Financial Strength rating of the
Reinsurer becomes less than Baa3 (or other equivalent rating
used by Moody's Investors Service, Inc.), or (ii) the Reinsurer
files a Risk-Based Capital Report with the Commissioner of
Insurance of the State of Rhode Island (or the then current
state of domicile of the Reinsurer) which indicates that its
Total Adjusted Capital is less than 150 percent of its Company
Action Level RBC (as such capitalized terms are defined in the
NAIC Life Risk-Based Capital Report Including Overview and
Instructions for Companies, dated as of December 31, 1994), or
(iii) the Reinsurer fails to be duly licensed to conduct a life
insurance business or accredited to act as a reinsurer in the
Company's state of domicile or in any other state or
jurisdiction where failure of the Reinsurer to be so licensed or
accredited would cause the Company to be ineligible for reserve
credit for the reinsurance ceded under this Agreement, unless
the Reinsurer provides security for its obligations under this
Agreement pursuant to the provisions of Article XII, or (iv) the
Reinsurer is the subject of an insolvency, liquidation,
supervision, conservation, rehabilitation or other similar
proceeding (each a "Recapture Event"). The Reinsurer shall
provide written notice to the Company within one Business Day of
the occurrence of any Recapture Event.
9.04. Automatic Termination. If, at the end of an
Accounting Period, none of the Reinsured SPDAs are in force,
this Agreement shall automatically terminate.
9.05. Termination Due to Nonpayment. Either party may
terminate this Agreement if the other party fails to pay, when
due, any amounts due under this Agreement, provided that the
non-delinquent party has given at least twenty (20) Business
Days prior written notice of its intent to terminate for that
reason. The delinquent party may avoid termination pursuant to
this Section 9.05 by paying all amounts that are delinquent and
then due, including any interest owing thereon pursuant to
Section 8.06, on or before the Termination Date specified in the
written notice.
9.06. Termination by Mutual Agreement. The parties may
mutually agree to terminate this Agreement at any time.
9.07. Payments on Termination. In the event that this
Agreement is terminated pursuant to this Article IX, a net
accounting and settlement as to any balance due under this
Agreement shall be undertaken by the parties to this Agreement
(the "Terminal Accounting and Settlement"). Any net payment
required under the Terminal Accounting and Settlement will
become due as of the Termination Date, and shall be paid in cash
or Cash Equivalents by the Reinsurer or the Company, as
appropriate, no later than the day on which the Termination
Report described in Section 9.08 is due to be provided. Net
payments required under the Terminal Accounting and Settlement
shall consist of:
(i) the Quarterly Settlement for the final
Accounting Period, calculated as of the Termination Date,
plus any interest due pursuant to Section 8.06; plus
(ii) the payment by the Reinsurer to the Company
of an amount equal to the Reserves as of the day
immediately prior to the Termination Date with respect to
the Reinsured SPDAs; plus
(iii) in the event of a termination of this
Agreement by the Reinsurer under Section 9.05, the payment
by the Company to the Reinsurer of an amount equal to the
product of (a) a fraction, the numerator of which is the
Reserves as of the Termination Date and the denominator of
which is the Reserves as of the Effective Date and (b) the
Ceding Commission.
9.08. Termination Report. Within ten (10) Business
Days after the Termination Date, the Company shall supply the
Reinsurer with a report that shall show the Terminal Accounting
and Settlement (the "Termination Report"). In the event that,
subsequent to the Terminal Accounting and Settlement, an
adjustment is made with respect to any amount taken into account
pursuant to Schedule B, a supplementary accounting shall take
place in accordance with the procedures set out in Sections 8.04
and 9.07. Any net amount owed to the Reinsurer or the Company
by reason of such supplemental accounting, plus any interest due
pursuant to Section 8.06, shall be paid within ten (10) Business
Days after the completion of such Termination Report or
supplementary accounting, as appropriate.
ARTICLE X
INSOLVENCY
10.01. Payments by Reinsurer. In the event of
insolvency, liquidation or rehabilitation of the Company, the
Reinsurer hereby agrees that, as to all reinsurance made, ceded
or otherwise becoming effective hereunder, the reinsurance shall
be payable to the Company, or to its conservator, receiver,
liquidator or statutory successor on the basis of the liability
of the Company under the Reinsured SPDAs, without diminution
because of the insolvency of the Company or because the
conservator, receiver, liquidator or statutory successor of the
Company has failed to pay all or a portion of any claim.
10.02. Claims. It is agreed that the conservator,
receiver, liquidator or statutory successor of the Company shall
give written notice to the Reinsurer of the pendency or
submission of a claim under any Reinsured SPDAs within a
reasonable time after such claim is filed in the insolvency,
liquidation or rehabilitation proceeding. During the pendency
of such claim, the Reinsurer may investigate such claim and
interpose, at its own expense, in the proceeding where such
claim is to be adjudicated any defense available to the Company
or its conservator, receiver, liquidator or statutory successor.
The expense thus incurred by the Reinsurer pursuant to this
Section 10.02 shall be chargeable, subject to the approval of
the court, against the Company as a part of the expense of
insolvency, liquidation or rehabilitation to the extent of a
proportionate share of the benefit which accrues to the Company
solely as a result of the defense undertaken by the Reinsurer.
10.03. No Waiver of Defenses. Nothing in this Article X
shall preclude the Reinsurer from asserting any excuse or
defense to payment of this reinsurance other than the excuses or
defenses of the insolvency of the Company and the failure of the
Company's conservator, receiver, liquidator or statutory
successor to pay all or a portion of any claim.
ARTICLE XI
ARBITRATION
11.01. Appointment of Arbitrators. In the event of any
disputes or differences arising hereafter between the
contracting parties with reference to any transaction under or
relating in any way to this Agreement as to which agreement
between the parties hereto cannot be reached, the same shall be
decided by arbitration. Three arbitrators will decide any
dispute or difference. The arbitrators must be disinterested
officers or retired officers of life insurance or life
reinsurance companies other than the two parties to this
Agreement or their affiliates. Each of the contracting parties
agrees to appoint one of the arbitrators with the third, the
"Umpire," to be chosen by the two appointed arbitrators. In the
event that either party should fail to choose an arbitrator
within twenty (20) Business Days following a written request by
the other party to do so, the requesting party may choose the
second arbitrator before entering upon arbitration. In the
event that the two arbitrators shall not be able to agree on the
choice of the Umpire within twenty (20) Business Days following
their appointment, each arbitrator shall nominate five
candidates within five Business Days thereafter. Each
arbitrator shall decline four of the candidates nominated by the
other arbitrator. The Umpire shall be chosen from the two
remaining candidates by drawing lots. Should the chosen Umpire
decline to serve, the candidate whose lot was not drawn shall be
appointed. This process shall continue until a candidate has
agreed to serve.
11.02. Proceedings. The parties will cooperate in good
faith in the voluntary, prompt and informal exchange of non-
privileged information relevant to the arbitration. The parties
will make every effort to conclude the information exchange
process within 30 days after notice that the Umpire has been
selected. Within 14 days after the Umpire is selected, the
parties will provide to each other copies of all documents in
their possession or control on which they will or may rely in
support of their position. On the request of either party, the
arbitrators will conduct a conference for the purpose of
determining additional information to be exchanged. If the
arbitrators determine that the requesting party has a reasonable
need for the information and that the request is not overly
burdensome to the opposing party, the arbitrators may order the
exchange of the additional information.
11.03. Decision. Within 60 days following the
appointment of the Umpire, each party must present its case to
the arbitrators. The arbitrators shall consider customary and
standard practices in the life reinsurance business. Within
sixty (60) days after the arbitration hearing, a decision shall
be reached by a majority vote of the arbitrators. There shall
be no appeal from their written decision, which shall be final
and binding upon the parties. Judgment may be entered on the
decision of the arbitrators by any court having jurisdiction.
11.04. Expenses of Arbitration. Each party shall bear
the expense of its own arbitrator (whether selected by that
party, or by the other party pursuant to the procedures set out
in Section 11.01) and related outside attorneys' fees, and shall
jointly and equally bear with the other party the expenses of
the third arbitrator.
11.05. Applicable Law. Any arbitration instituted
pursuant to this Article shall be held in the City of Baltimore,
State of Maryland, and the laws of the State of Maryland and, to
the extent applicable, the Federal Arbitration Act shall govern
the interpretation and application of this Agreement.
11.06 Survival of Article. This Article shall survive
termination of this Agreement.
11.07. Enforcement. The parties intend this Article to
be enforceable in accordance with the Federal Arbitration Act (9
U.S.C. Section 1 et seq., as amended). In the event that either party
refuses to submit to arbitration as required by this Article,
the other party may request that a United States District Court
compel arbitration in accordance with the Federal Arbitration
Act. Both parties consent to the jurisdiction of such a court
to enforce this Article and to confirm and enforce the
performance of an award of the arbitrators.
ARTICLE XII
SECURITY
12.01. Security. If required in order to give the
Company full reinsurance reserve credit, the Reinsurer shall
comply with any necessary financial security requirements
imposed by insurance laws and regulations of the State of
Maryland and of any other state or jurisdiction with respect to
which the Company is ineligible for reserve credit for the
reinsurance ceded under this Agreement.
12.02. Establishment of Trust. If credit for
reinsurance, as required under this Article XII, is not
otherwise available to the Company with respect to the
reinsurance hereunder, the Reinsurer shall enter into a trust
agreement (the "Trust Agreement") and establish a trust account
for the benefit of the Company with respect to the Reserves on
or before the date of filing of the first financial statement of
the Company for which such credit for reinsurance is required,
with a bank or other financial institution acceptable to the
Company, which shall be a Qualified Financial Institution.
12.03. Purpose of Trust. The Reinsurer agrees to
deposit, on or before the date set forth in Section 12.02, and
maintain in said Trust Account assets to be held in trust by the
Trustee for the benefit of the Company as security for the
payment of the Reinsurer's obligations to the Company under this
Agreement. Such assets shall initially be in an amount that is
equal to or exceeds the Reserves, with respect to the Reinsured
SPDAs, shown on the Company's statutory financial statements as
of the date set forth in Section 12.02, and shall be increased
or decreased, as appropriate, for each Accounting Period in
accordance with the terms of this Agreement and the terms of the
Trust Agreement.
12.04. Trust Assets. The Reinsurer agrees that the
assets so deposited, and assets held in the trust account
thereafter, shall consist only of cash (United States legal
tender), certificates of deposit (issued by a United States bank
and payable in United States legal tender), and investments of
the types permitted by Section 09.30.97.08 of the Code of
Maryland Regulations.
12.05. Title of Assets. The Reinsurer, prior to
depositing assets with the Trustee, shall execute all
assignments and endorsements in blank, and transfer legal title
to the Trustee of all shares, obligations or any other assets
requiring assignments, in order that the Company, or the Trustee
upon direction of the Company, may whenever necessary negotiate
any such assets without consent or signature from the Reinsurer
or any other entity.
12.06. Settlements. All settlements of account under
the Trust Agreement between the Company and the Reinsurer shall
be made in cash or Cash Equivalents.
12.07. Withdrawals by the Company. The Reinsurer and
the Company agree that the assets in the Trust Account may be
withdrawn by the Company at any time, notwithstanding any other
provisions in this Agreement, provided such assets are applied
and utilized by the Company or any successor of the Company by
operation of law, including, without limitation, any liquidator,
rehabilitator, receiver or conservator of the Company, without
diminution because of the insolvency of the Company or the
Reinsurer, only for the following purposes:
(i) to reimburse the Company for the Reinsurer's
share of surrenders, withdrawals, death benefits or other
amounts specified in Section 7.01 of this Agreement that
have been paid by the Company pursuant to the provisions of
the Reinsured SPDAs;
(ii) to fund an account with the Company in an
amount at least equal to the deduction, for reinsurance
ceded, from the Company's liabilities under Reinsured SPDAs
ceded under this Agreement. Such account shall include,
but not be limited to, amounts for policy reserves, claims
and losses incurred (including losses incurred but not
reported), and unearned premium reserves; and
(iii) to pay any other amounts the Company claims
are due under this Agreement.
12.08 Withdrawals by the Reinsurer. The Reinsurer
shall have the right to seek the Company's approval to withdraw
all or any part of the assets from the Trust Account and
transfer such assets to the Reinsurer, provided that:
(i) the Reinsurer shall, at the time of withdrawal,
replace the withdrawn assets with other assets of a type
permitted hereunder having a market value equal to the
market value of the assets withdrawn, so as to maintain the
Trust Account in the required amount; or
(ii) after such withdrawal and transfer, the market
value of the Trust Account is no less than 102% of the
required amount.
In the event that the Reinsurer seeks the Company's approval
hereunder, the Company shall not unreasonably or arbitrarily
withhold its approval.
12.09. Return of Assets. In the event that the Company
withdraws assets from the Trust Account for the purposes set
forth in Section 12.07(i) or (ii) in excess of actual amounts
required to meet the Reinsurer's obligations to the Company, or
in excess of amounts determined to be due under Section
12.07(iii), the Company shall return such excess to the
Reinsurer, plus interest at the prime (or base) rate of interest
as set forth in Section 8.06 of this Agreement. In the event of
a dispute arising under this Article XII, the arbitration panel
established pursuant to Article XI of this Agreement shall have
the right to award interest at a rate that it determines to be
equitable, and may award attorney's fees, arbitration costs and
other expenses.
12.10. Letters of Credit. At the option of the
Reinsurer, letters of credit meeting the requirements of Section
09.30.97.08 of the Code of Maryland Regulations may be
substituted in whole or in part for the Trust Account in order
to provide the credit for reinsurance required hereunder. The
letter of credit will be procured from a Qualified Financial
Institution, and may be drawn down at any time by the Company,
only for the purposes set forth in Section 12.07(i), (ii) or
(iii) of this Agreement, without diminution because of the
insolvency of the Company or the Reinsurer. If the letter of
credit is drawn down, the provisions of Section 12.09 shall
apply to the amount so drawn.
12.11. Expenses. All expenses of establishing and
maintaining the Trust Account or letter of credit shall be paid
by the Reinsurer.
ARTICLE XIII
REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY
13.01. Organization, Standing and Authority of the
Company. The Company is a life insurance company duly
organized, validly existing and in good standing under the laws
of the State of Maryland and has all requisite corporate power
and authority to carry on the operations of its business as they
are now being conducted. The Company has all requisite
corporate power and authority to own and transfer ownership of
the Investment Assets that are to be transferred in connection
with the Initial Reinsurance Premium.
13.02. Authorization. The Company has all requisite
corporate power and authority to enter into this Agreement and
to perform its obligations hereunder. The execution and
delivery by the Company of this Agreement, and the performance
by the Company of its obligations under this Agreement, have
been duly authorized by all necessary corporate action. This
Agreement, when duly executed and delivered by the Company,
subject to the due execution and delivery by the Reinsurer, will
be a valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms.
13.03. Assets. With respect to each of the Investment
Assets, no consent or other approval is required to be obtained
by the Company to permit the Company to convey, transfer and
sell the Investment Assets to the Reinsurer pursuant to this
Agreement.
13.04. No Conflict or Violation. The execution,
delivery and performance of this Agreement and the consummation
of the transactions contemplated hereby in accordance with the
respective terms and conditions hereof will not (a) violate any
provision of the Articles of Incorporation or Bylaws of the
Company, or (b) violate any order, judgment, injunction, award
or decree of any court, arbitrator or governmental or regulatory
body against, or binding upon, or any agreement with, or
condition imposed by, any governmental or regulatory body,
foreign or domestic, binding upon the Company.
13.05. Intermediaries and Financial Advisors. Except
for Oppenheimer & Co., Inc., no reinsurance intermediary or
broker or other advisor has acted directly or indirectly as such
for, or is entitled to any compensation from, the Company in
connection with this Agreement.
13.06. Investigations. The Company will notify the
Reinsurer immediately, in writing, of any and all investigations
of the Company or its directors, principal officers or
shareholders conducted by any Federal, state or local
governmental or regulatory agency other than routine state
insurance department examinations.
13.07. Approvals of Governmental Authorities.
(a) Except as set forth on Schedule G hereto, no consent,
waiver, license, approval, order or authorization of, or
registration, filing or declaration with, or notices to, any
person, entity or Governmental Authority is required to be
obtained, made or given by or with respect to the Company in
connection with (i) the execution and delivery of this Agreement
by the Company, or (ii) the consummation by the Company of the
transactions contemplated hereby.
(b) Except as provided below, the Company shall take, and
shall cause its affiliates to take, all reasonable steps
necessary or appropriate, and shall use, and shall cause its
affiliates to use, all commercially reasonable efforts, to
obtain as promptly as practicable all consents, waivers,
licenses, approvals, orders and authorizations of, or to make as
promptly as practicable all registrations, filings or
declarations with, or notices to, any person, entity or
Governmental Authority listed on Schedule G attached hereto and
required to be obtained by the Company or any of its affiliates
in connection with the consummation of the transactions
contemplated by this Agreement. Within five Business Days of
the earlier of (i) receipt of an interpretation from the
Premerger Notification Office that the transaction anticipated
by this Agreement is not exempt from the regulatory requirements
of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, and the rules and regulations thereunder (the "Act")
and (ii) August 2, 1996, the Company shall take, and shall cause
its affiliates to take, all reasonable steps necessary and
appropriate to make all necessary submissions and filings under
the Act and shall request early termination of the waiting
periods under the Act.
(c) The Company shall cooperate with the Reinsurer and its
affiliates in seeking to obtain all such consents, waivers,
licenses, approvals, orders and authorizations, and to make all
such registrations, filings, declarations and notices and shall
provide, and shall cause its affiliates to provide, such
information and communications to any person, entity or
Governmental Authority as such person, entity or Governmental
Authority may reasonably request in connection therewith.
ARTICLE XIV
REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE REINSURER
14.01. Organization, Standing and Authority of the
Reinsurer. The Reinsurer is a life insurance company duly
organized, validly existing and in good standing under the laws
of the State of Rhode Island and has all requisite corporate
power and authority to own, lease and operate its properties and
assets and to carry on the operations of its business as they
are now being conducted. The Reinsurer is duly licensed and
admitted as an insurer or accredited as a reinsurer under the
laws of all States and jurisdictions of the United States where
failure of the Reinsurer to be so licensed and admitted or
accredited would cause the Company to be ineligible for reserve
credit for the reinsurance ceded under this Agreement, and is
authorized under the laws and regulations of said States and
jurisdictions to reinsure the Reinsured SPDAs under this
Agreement.
14.02. Authorization. The Reinsurer has all requisite
corporate power and authority to enter into this Agreement and
to perform its obligations hereunder. The execution and
delivery by the Reinsurer of this Agreement, and the performance
by the Reinsurer of its obligations under this Agreement, have
been duly authorized by all necessary corporate action. This
Agreement, when duly executed and delivered by the Reinsurer,
subject to the due execution and delivery by the Company, will
be a valid and binding obligation of the Reinsurer, enforceable
against the Reinsurer in accordance with its terms.
14.03. No Conflict or Violation. The execution,
delivery and performance of this Agreement and the consummation
of the transactions contemplated hereby will not (a) violate any
provision of the Articles of Incorporation, Bylaws or other
charter or organizational document of the Reinsurer, or
(b) violate any order, judgment, injunction, award or decree of
any court, arbitrator or governmental or regulatory body
against, or binding upon, or any agreement with, or condition
imposed by, any governmental or regulatory body, foreign or
domestic, binding upon the Reinsurer.
14.04 Intermediaries and Financial Advisors. No
reinsurance intermediary or broker or other advisor has acted
directly or indirectly as such for, or is entitled to any
compensation from, the Reinsurer in connection with this
Agreement.
14.05. Investigations. The Reinsurer will notify the
Company immediately, in writing, of any and all investigations
of the Reinsurer or its directors, principal officers or
shareholders conducted by any Federal, state or local
governmental or regulatory agency other than routine state
insurance department examinations.
14.06. Approvals of Governmental Authorities.
(a) Except as set forth on Schedule H hereto, no consent,
waiver, license, approval, order or authorization of, or
registration, filing or declaration with, or notices to, any
person, entity or Governmental Authority is required to be
obtained, made or given by or with respect to the Reinsurer in
connection with (i) the execution and delivery of this Agreement
by the Reinsurer, or (ii) the consummation by the Reinsurer of
the transactions contemplated hereby.
(b) Except as provided below, the Reinsurer shall take,
and shall cause its affiliates to take, all reasonable steps
necessary or appropriate, and shall use, and shall cause its
affiliates to use, all commercially reasonable efforts, to
obtain as promptly as practicable all consents, waivers,
licenses, approvals, orders and authorizations of, or to make as
promptly as practicable all registrations, filings or
declarations with, or notices to, any person, entity or
Governmental Authority listed on Schedule H attached hereto and
required to be obtained by the Reinsurer or any of its
affiliates in connection with the consummation of the
transactions contemplated by this Agreement. In addition,
within two days after execution of this Agreement, the Reinsurer
shall submit, or cause to be submitted, a letter to the
Premerger Notification Office requesting an interpretation as to
whether the transaction contemplated by this Agreement is exempt
from the reporting requirements of the Act. Within five
Business Days of the earlier of (i) receipt of an interpretation
from the Premerger Notification Office that the transaction
anticipated by this Agreement is not exempt from the regulatory
requirements of the Act and (ii) August 2, 1996, the Reinsurer
shall take, and shall cause its affiliates to take, all
reasonable steps necessary and appropriate to make all necessary
submissions and filings under the Act and shall request early
termination of the waiting periods under the Act.
(c) The Reinsurer shall cooperate with the Company and its
affiliates in seeking to obtain all such consents, waivers,
licenses, approvals, orders and authorizations, and to make all
such registrations, filings, declarations and notices and shall
provide, and shall cause its affiliates to provide, such
information and communications to any person, entity or
Governmental Authority as such person, entity or Governmental
Authority may reasonably request in connection therewith.
14.07. Agency and Distribution Agreements. From the
date of this Agreement through the Termination Date, the
Reinsurer shall not, and shall not permit any of its affiliates
to, take any action or omit to take any action that would cause
the Company to be in breach of or to violate any term or
provision of any of the Agency and Distribution Agreements
listed on Schedule F hereto. The Reinsurer shall indemnify the
Company and its officers, directors, employees, affiliates,
agents, successors and assigns (the "indemnified parties")
against, and hold the indemnified parties harmless from all
losses, claims, damages and liabilities and shall reimburse the
indemnified parties for all expenses of any kind or nature
whatsoever (including reasonable attorneys' fees) as incurred,
that are based upon or arise out of the breach by the Reinsurer
of its covenants and obligations provided for in this Section
14.07.
ARTICLE XV
CONDITIONS TO CLOSING
15.01. Conditions Precedent to Obligation of the
Reinsurer. The obligation of the Reinsurer to consummate the
Closing is subject to satisfaction of the following conditions
at or prior to the Closing (unless expressly waived in writing
by the Reinsurer at or prior to the Closing):
(a) All of the terms, covenants and conditions of this
Agreement to be complied with and performed by the Company at or
prior to the Closing shall have been complied with and performed
by it, and the representations and warranties made by the
Company in this Agreement shall be true and correct at and as of
the Closing, with the same force and effect as though such
representations and warranties had been made at and as of the
Closing.
(b) The Reinsurer shall have received from the Company a
certificate dated the Closing Date and signed by an executive
officer of the Company certifying that the conditions specified
in subsection (a) above have been fulfilled.
(c) All consents, waivers, licenses, approvals, orders and
authorizations of, and registrations, filings and declarations
with, and notices to, any person, entity or Governmental
Authority listed on Schedule H required in connection with the
consummation of the transactions contemplated hereby shall have
been duly obtained, made or given, including the expiration of
any applicable waiting periods, and shall be in full force and
effect at the Closing.
(d) The Company shall have duly executed and delivered to
the Reinsurer the Form of Joint Election Under IRC Regulation
1.848-2(g)(8) substantially in the form attached hereto as
Exhibit J.
15.02. Conditions Precedent to Obligation of the
Company. The obligation of the Company to consummate the
Closing is subject to satisfaction of the following conditions
at or prior to the Closing (unless expressly waived in writing
by the Company at or prior to the Closing):
(a) All of the terms, covenants and conditions of
this Agreement to be complied with and performed by the
Reinsurer at or prior to the Closing shall have been complied
with and performed by it, and the representations and warranties
made by the Reinsurer in this Agreement shall be true and
correct at and as of the Closing, with the same force and effect
as though such representations and warranties had been made at
and as of the Closing.
(b) The Company shall have received from the Reinsurer a
certificate dated the Closing Date and signed by an executive
officer of the Reinsurer certifying that the conditions
specified in subsection (a) above have been fulfilled.
(c) All consents, waivers, licenses, approvals, orders and
authorizations of, and registrations, filings and declarations
with, and notices to, any person, entity or Governmental
Authority listed on Schedule G required in connection with the
consummation of the transactions contemplated hereby shall have
been duly obtained, made or given, including the expiration of
any applicable waiting periods, and shall be in full force and
effect.
(d) The Reinsurer shall have duly executed and delivered
to the Company the Form of Joint Election Under IRC Regulation
1.848-2(g)(8) substantially in the form attached hereto as
Exhibit J.
(e) The Company shall have received the opinion, dated the
Closing Date, of Bernard R. Beckerlegge, Senior Vice President
and General Counsel of the Reinsurer, in form and substance
acceptable to the Company, substantially in the form attached
hereto as Exhibit I.
ARTICLE XVI
MISCELLANEOUS PROVISIONS
16.01. Headings and Schedules. Headings used herein are
not a part of this Agreement and shall not affect the terms
hereof. The attached Schedules are a part of this Agreement.
16.02. Notices. All notices and communications
hereunder shall be in writing and shall be deemed given if
received three (3) days after mailing, or if by telefax or by
hand, when received, and if by overnight mail, on the next day.
Any written notice shall be by either certified or registered
mail, return receipt requested, or overnight delivery service
(providing for delivery receipt) or delivered by hand. All
notices or communications with the Reinsurer under this
Agreement shall be addressed as follows:
Keyport Life Insurance Company
125 High Street
Boston, Massachusetts
Attention: Paul H. LeFevre, Jr.
Fax No.: (617) 526-1618
All notices and communications with the Company under this
Agreement from the date hereof until September 3, 1996 shall be
directed to:
Fidelity and Guaranty Life Insurance Company
6255 Smith Avenue
Baltimore, Maryland 21209-3653
Attention: Chief Actuary
Fax No.: (410) 205-0629
All notices and communications with the Company under this
Agreement after September 3, 1996 shall be directed to:
Fidelity and Guaranty Life Insurance Company
100 East Pratt Street
Baltimore, Maryland 21201
Attention: Chief Actuary
with copies to:
LeBoeuf, Lamb, Greene & MacRae, L.L.P.
125 West 55th Street
New York, New York 10019
Attention: Michael Groll
Fax No.: (212) 424-8500
Changes in notice addresses or recipients may be made
by the Reinsurer or the Company by following the procedure
specified in this section rather than the procedure for
amendment of this Agreement.
16.03. Severability and Governing Law. If any term or
provision of this Agreement shall be held void, illegal, or
unenforceable, the validity of the remaining portions or
provisions shall not be affected thereby. This Agreement shall
be governed by the laws of the State of Maryland, without giving
effect to principles of conflicts of law thereof.
16.04. Successors and Assigns. This Agreement may not
be assigned by either party without the prior written consent of
the other. The provisions of this Agreement shall be binding
upon and inure to the benefit of the parties hereto and their
respective successors and assigns as permitted herein.
16.05. Execution in Counterparts. This Agreement may be
executed by the parties hereto in any number of counterparts,
and by each of the parties hereto in separate counterparts, each
of which counterparts, when so executed and delivered, shall be
deemed to be an original, but all such counterparts shall
together constitute but one and the same instrument.
16.06. Currency. All payments and accounts shall be
made in United States Dollars, and all fractional amounts shall
be rounded to the nearest whole dollar.
16.07. Entire Agreement. This Agreement supersedes all
prior discussions and written and oral agreements and
constitutes the sole and entire agreement between the parties
with respect to the subject matter hereof.
16.08. Amendment or Waiver. No amendment or waiver of
any provision of this Agreement shall be effective unless set
forth in writing, signed by duly authorized officers of the
parties hereto. A waiver shall constitute a waiver only with
respect to the particular circumstance for which it is given and
not a waiver of any future circumstance.
16.09. Interpretation. For purposes of this Agreement,
the words "hereof," "herein," "hereby," and other words of
similar import refer to this Agreement as a whole unless
otherwise indicated. Whenever the words "include," "includes,"
or "including" are used in this Agreement, they shall be deemed
to be followed by the words "without limitation." Whenever the
singular is used herein, the same shall include the plural, and
whenever the plural is used herein, the same shall include the
singular, where appropriate.
16.10. Survival of Representations, Warranties and
Agreements. The Reinsurer or the Company, as the case may be,
has the right to rely fully upon the representations,
warranties, covenants and agreements of the Company or the
Reinsurer, as the case may be, contained in this Agreement. All
representations and warranties made by the Company or the
Reinsurer in this Agreement shall survive the execution and
delivery hereof. The provisions of Section 3.03, Section 14.07
and Article XI shall survive the termination of this Agreement.
16.11. No Third-Party Beneficiaries. Nothing in this
Agreement is intended or shall be construed to give any person,
other than the parties hereto, their successors and permitted
assigns, any legal or equitable right, remedy or claim under or
in respect of this Agreement or any provision contained herein.
16.12. Termination of Agreement.
(a) This Agreement may be terminated at any time prior to
the Closing Date: (i) by mutual consent of the Company and the
Reinsurer or (ii) by either the Company or the Reinsurer, if the
Closing Date shall not have occurred on or before October 31,
1996; provided, however, that the right to terminate this
Agreement under this Section 16.12 will not be available to any
party whose failure to fulfill any obligation under this
Agreement has been the cause of, or resulted in, the failure of
the Closing Date to occur on or before such date.
(b) If this Agreement is terminated pursuant to Section
16.12(a), this Agreement shall become void and of no effect with
no liability on the part of any party hereto.
IN WITNESS WHEREOF, the parties hereto have caused
this Agreement to be executed as of the date first above written
by their duly authorized representatives.
FIDELITY AND GUARANTY LIFE
INSURANCE COMPANY
By /s/ Michel Perreault
Name: Michel Perreault
Title: Vice President Chief Actuary
KEYPORT LIFE INSURANCE
COMPANY
By /s/ Paul LeFevre
Name: Paul LeFevre
Title: Senior Vice President and Chief
Financial Officer
AMENDMENT NO. 1 TO COINSURANCE AGREEMENT
AMENDMENT NO. 1 TO COINSURANCE AGREEMENT, dated as of
August 8, 1996 (this "Amendment No. 1"), by and between FIDELITY
AND GUARANTY LIFE INSURANCE COMPANY, a life insurance company
organized under the laws of the State of Maryland (the
"Company"), and KEYPORT LIFE INSURANCE COMPANY, a life insurance
company organized under the laws of the State of Rhode Island
(the "Reinsurer").
WHEREAS, the Company and the Reinsurer have entered
into the Coinsurance Agreement, dated as of July 26, 1996 (the
"Coinsurance Agreement"); and
WHEREAS, the Company and the Reinsurer desire to amend
and modify the Coinsurance Agreement as set forth herein.
NOW, THEREFORE, for good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the
Company and the Reinsurer hereby agree that the Coinsurance
Agreement shall be, and hereby is, amended and modified as
follows:
1. The definition of "Blended Rate" in ARTICLE I is hereby
amended and replaced in its entirety to read as follows:
"Blended Rate" means the percentage rate equal to the
sum of (i) two-thirds of the one year Treasury Note
rate as of 3 p.m. on the Business Day which is two days
prior to the Closing Date plus (ii) one-third of the
three year Treasury Note rate as of 3 p.m. on the
Business Day which is two days prior to the Closing
Date.
2. This Amendment No. 1 shall be effective when executed
and delivered by the parties hereto.
3. Except as amended and modified by this Amendment No. 1,
all other terms of the Coinsurance Agreement shall remain
unchanged.
4. This Amendment No. 1 may be executed in two or more
counterparts, each of which shall be deemed to be an original,
but all of which shall constitute one and the same instrument.
5. This Amendment No. 1 shall be governed by the laws of
the State of Maryland, without giving effect to principles of
conflicts of law thereof.
IN WITNESS WHEREOF, each of the Company and the
Reinsurer has caused this Amendment No. 1 to be executed on its
behalf by its officers thereunto duly authorized, all as of the
day and year first above written.
FIDELITY AND GUARANTY LIFE
INSURANCE COMPANY
/s/ Michel Perreault
By ____________________________
Name: Michel Perreault
Title: Vice President-Actuary
KEYPORT LIFE INSURANCE COMPANY
/s/ Paul LeFevre
By ____________________________
Name: Paul LeFevre
Title: Senior Vice President
and CFO
AMENDMENT NO. 2 TO COINSURANCE AGREEMENT
AMENDMENT NO. 2 TO COINSURANCE AGREEMENT, dated as of November ______,
1996 (this "Amendment No. 2"), by and between FIDELITY AND GUARANTY LIFE
INSURANCE COMPANY, a life insurance company organized under the laws of the
State of Maryland (the "Company"), and KEYPORT LIFE INSURANCE COMPANY, a
life insurance company organized under the laws of the State of Rhode
Island (the "Reinsurer").
WHEREAS, the Company and the Reinsurer have entered into the
Coinsurance Agreement, dated as of July 26, 1996, as amended by Amendment
No. 1, dated as of August 8, 1996 (as so amended, the "Coinsurance
Agreement"); and
WHEREAS, the Company and the Reinsurer desire to amend and modify the
Coinsurance Agreement as set forth herein.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and the Reinsurer
hereby agree that the Coinsurance Agreement shall be, and hereby is,
amended and modified as follows:
1. The following definition of "Internal Replacement" is hereby
added in ARTICLE I:
"Internal Replacement" means any instance in which a
Reinsured SPDA is surrendered and another annuity contract that
is written by the company is issued to the owner of the Reinsured
SPDA as part of a direct exchange.
2. The definition of "Reinsured SPDA" in ARTICLE I is hereby amended
and replaced in its entirety to read as follows:
"Reinsured SPDAs" means (I) the SPDAs, including any
Endorsements thereto and (ii) any single premium deferred annuity
contracts replacing SPDAs and any endorsements to SPDAs issued by
the Company on or subsequent to the Effective Date with the
consent of the Reinsurer. Reinsured SPDAs shall not include (i)
Retained Asset Account Funds in existence on the Effective Date
and (ii) Internal Replacements issued in accordance with the
terms of Section 9.09 of this Agreement.
3. Section 7.01(a) is hereby amended and replaced in its entirety to
read as follows:
(a) The Reinsurer shall reimburse the Company, in accordance
with Sections 7.01(b) and 8.01(b), for an amount equal to:
(i) 100.14% of the sum of all (A) death benefits, (B)
surrender or (C) withdrawal payments and periodic payments under
annuity settlement options elected by the owner, and paid by the
Company, with respect to Reinsured SPDAs that become due on or
after the Effective Date; and
(ii) 99% of the Surrender Value as of the date of
exchange with respect to Reinsured SPDAs that are surrendered as
an Internal Replacement on or after the Effective Date (such
Account Values, together with the death benefits and other
payments referred to in the foregone clause (i)(A), (i)(B) and
(i)(C) above, are referred to collectively as "Benefits").
The reimbursement for Benefits shall be net of surrender charges
pursuant to the terms of the relevant Reinsured SPDAs.
4. ARTICLE IX is hereby retitled, "DURATION, RECAPTURE, TERMINATION
AND INTERNAL REPLACEMENTS."
5. Section 9.09 is hereby added in ARTICLE IX to read as follows:
"Section 9.09. Internal Replacements. The Company shall
request, on five (5) Business Days' written notice to the
Reinsurer, the right to issue an Internal Replacement upon
exchange of Reinsured SPDAs. Any Reinsured SPDA that is
surrendered or exchanged in connection with an Internal
Replacement shall be treated as surrendered and the Reinsurer
shall pay to the Company, in accordance with Sections 7.01(a)(ii)
and 8.01(b), an amount equal to 99% of the Surrender Value as of
the date of such exchange in respect of such Reinsured SPDA. The
other annuity or insurance contract to which a Reinsured SPDA is
converted or for which it is exchanged as an Internal
Replacement, shall not be a Reinsured SPDA under this Agreement."
6. This Amendment No. 2 shall be effective when executed and
delivered by the parties hereto.
7. Except as amended and modified by this Amendment No. 2, all other
terms of the Coinsurance Agreement shall remain unchanged.
8. This Amendment No. 2 may be executed in two or more counterparts,
each of which shall be deemed to be an original, but all of which
shall constitute one and the same instrument.
9. This Amendment No. 2 shall be governed by the laws of the State
of Maryland, without giving effect to principles of conflicts of law
thereof.
IN WITNESS WHEREOF, each of the Company and the Reinsurer has caused
this Amendment No. 2 to be executed on its behalf by it officers thereunto
duly authorized, all as of the day and year first above written.
FIDELITY AND GUARANTY
LIFE INSURANCE COMPANY
/s/ Michel Perreault
By: _______________________________________
Michel Perreault
Vice President, Chief Actuary
KEYPORT LIFE INSURANCE COMPANY
/s/ Paul LeFevre
By: _______________________________________
Paul LeFevre
Senior Vice President and Chief Financial
Officer
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
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<DEBT-CARRYING-VALUE> 10,718,644
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0
0
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0
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