As filed with the Securities and Exchange Commission on May 30, 1997
Registration No. 333-13609
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Post-Effective Amendment No. 1
to the
FORM S-1 REGISTRATION STATEMENT
Under
The Securities Act of 1933
KEYPORT LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
Rhode Island 05-0302931
(State or other Jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
Number)
6355
(Primary Standard Industrial Classification Code Number)
125 High Street
Boston, Massachusetts 02110
(Address of Principal Executive Office)
Bernard R. Beckerlegge, Esquire
Senior Vice President and General Counsel
(617) 526-1610
(Name, address, and telephone number of agent for service)
Approximate date of commencement of proposed sale to the public. As soon as
practicable following effectiveness of this registration statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [X]
=========================================================================
CALCULATION OF REGISTRATION FEE
Title of Amount Proposed Proposed Amount
Each Class to be Maximum Maximum of
of Registered1 Offering Aggregate Registration
Securities Price Per Offering Fee
to be Unit1 Price2
Registered
Deferred Group $300,000,000 $90,9093
and Individual
Annuity
Contracts and
Participating
Interests therein
1The amount being registered and the proposed maximum offering price per unit
is not applicable in that these contracts are not issued in the predetermined
amount or units.
2The maximum aggregate offering price is estimated solely for the purpose of
determining the registration fee.
3$100 paid with initial registration.
<PAGE>
KEYPORT LIFE INSURANCE COMPANY
Cross Reference Sheet Pursuant to
Regulation S-K, Item 501(b)
Form S-1 Item Number and Caption Heading in Prospectus
1. Forepart of the Registration
Statement and Outside Front
Cover Page of Prospectus Outside Front Cover Page
2. Inside Front and Outside Back
Cover Pages of Prospectus Inside Front Cover
3. Summary Information, Risk
Factors and Ratio of Earnings
to Fixed Charges Summary; Accumulation
Period
4. Use of Proceeds Investments by Keyport
5. Determination of Offering Price Description of Contracts
and Certificates
6. Dilution Not Applicable
7. Selling Security Holders Not Applicable
8. Plan of Distribution Distribution of Certificate
9. Description of Securities to
be Registered Description of Contracts
and Certificates
10. Interests of Named Experts
and Counsel Experts; Legal Matters
11. Information with Respect to
the Registrant The Company; Company
Management; Executive
Compensation; Compensation
of Directors; Financial
Statements; Legal
Proceedings
12. Disclosure of Commission
Position on Indemnification for
Securities Act Liabilities See Part II, Item 17
<PAGE>
GROUP AND INDIVIDUAL FLEXIBLE PREMIUM
ANNUITY CONTRACTS
Keyport Life Insurance Company
Executive & Administrative Offices
125 High Street, Boston, Massachusetts 02110
(617) 526-1400
SUMMARY
This Prospectus describes interests in group and individual deferred annuity
contracts ("Contract(s)") which are designed and offered by Keyport Life
Insurance Company ("Keyport" or "Company") to provide retirement benefits for
eligible individuals. Eligible individuals include persons who participate
in certain trusts or certain plans established for eligible individuals and
members of eligible groups. Eligible individuals may also include persons who
collectively form a group of employees of an employer. As required by certain
states, the Contract may be offered as an Individual Contract. The text that
follows and the Glossary of Special Terms at page provide definitions of
the defined terms used in this Summary and throughout the Prospectus.
(This "SUMMARY" section continues on page 2.)
The Contract may be sold by or through banks or other depository
institutions. The Contract and Certificates: are not insured by the FDIC; are
not a deposit or other obligation of, or guaranteed by, the depository
institution; and are subject to investment risks, including the possible loss
of principal amount invested, as described below.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE. THIS PROSPECTUS SETS FORTH INFORMATION A PROSPECTIVE
CONTRACT OWNER SHOULD KNOW BEFORE PURCHASING A CONTRACT. THIS PROSPECTUS
SHOULD BE RETAINED FOR FURTHER REFERENCE. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING IN ANY STATE OR JURISDICTION IN WHICH SUCH OFFERING
MAY NOT BE LAWFULLY MADE. NO PERSON IS AUTHORIZED BY KEYPORT TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS, IN CONNECTION WITH THIS OFFERING AND, IF GIVEN OR MADE, SUCH
UNAUTHORIZED INFORMATION OR REPRESENTATIONS SHOULD NOT BE RELIED UPON.
SURRENDER OF THESE SECURITIES AT TIMES OTHER THAN THE END OF A TERM COULD
RESULT IN THE RECEIPT OF LESS THAN THE CONTRACT OWNER'S PREMIUM PAYMENT(S).
The date of this Prospectus is May 1, 1997.
<PAGE>
Allocated and Non-Allocated Certificates are issued under Group Contracts
with Allocated Certificates, each individual's interest is separately
accounted for in a specific account established for that individual. Each
participant in a Non-Qualified plan and in certain Qualified Plans will be
issued an Allocated Certificate evidencing interest in an Allocated Contract
and will have a 100% vested interest in all values credited to the
participant's Account. Under certain Certificates issued with respect to
Qualified Plans ("Non-Allocated Certificates"), however, a participant's
interest may be vested in the Plan in which they are participating rather
than in a Certificate. In such cases, the Certificate will usually be owned
by the Trustee(s) of the Plan, and a single Account will be established and
held on behalf of all participants in the Plan on a non-allocated basis.
Each Account is further accounted for by establishing Sub-Accounts.
Unless otherwise noted or the context so requires, all references to
"Certificates" include Group Contracts, Allocated and Non-Allocated
Certificates, Certificates issued thereunder, and Individual Contracts.
An Initial Premium of at least $5,000 per Certificate Owner's Account must
accompany the Certificate application or the Enrollment Form for a
participant under an Allocated Certificate. An Initial Premium of $500,000
or more requires Keyport's approval. No premium needs to accompany the Group
Contract Application. The Initial Premium is the only premium payment
required with respect to a particular Certificate. An Index Sub-Account may
be established with a minimum premium payment, transfer, or Indexed Value
upon renewal of $1,000. Eligible individuals may make Subsequent Premium
payments unless the payment will be made within 10 years of the Income Date.
The minimum Subsequent Premium is $1,000; the maximum is $100,000. (See
"Enrollment Forms and Premium Payments", page ___.)
Premium payments credited to a Certificate Owner's Account become part of the
General Account assets of Keyport. Keyport owns its General Account assets,
and generally intends to invest these payment amounts in U.S. Government
securities and certain commercial debt securities having maturities generally
matching the applicable Terms. Keyport may also invest a portion of its
assets in various instruments, including equity options, futures, forwards,
and other instruments based on the S&P Index to hedge its obligations with
respect to Index Sub-Accounts. Keyport may also buy and sell interest rate
swaps and caps, Treasury bond futures, and similar instruments to hedge its
exposure to changes in interest rates. (See "Investments by Keyport", page
___)
Initial Premium and Subsequent Premium payments may be allocated to two types
of Sub-Accounts; an Interest Sub-Account, and an Index Sub-Account(s) of
varying durations ("Terms"). The Sub-Accounts are the method used to keep
track of a Certificate Owner's values accrued through the crediting of a
declared interest rate on an Interest Sub-Account, or accrued through the
application of Index Increases or Index Decreases, and End-of-Term
Adjustments on an Index Sub-Account. A Certificate Owner may establish only
one Interest Sub-Account to which all premium payments and transfers may be
allocated. A Certificate Owner may establish multiple Index Sub-Accounts
because each premium payment and transfer that is allocated to an Index Sub-
Account establishes a new Index Sub-Account.
Interest Sub-Account
Interest is credited to an Interest Sub-Account at an interest rate declared
(the "Declared Rate") on the first day of each calendar month and guaranteed
for that month. The Declared Rate will never be less than an effective
annual rate of 3%. An Interest Sub-Account has an Accumulated Value and a
Surrender Value which are used to determine death benefits, transfer and
surrender amounts, and annuity values. (See "Interest Sub-Account",
page___.)
Index Sub-Account
Index Sub-Accounts have both an Indexed Value and a Surrender Value.
Interest credited to the Indexed Value ("Index Increases") or decreases in
Indexed Value ("Index Decreases") may be subject to a minimum ("Floor") and a
maximum ("Cap"). As long as the Floor is zero or greater, there will never
be any Index Decreases. Index Increases or Index Decreases are calculated by
reference to Guaranteed Interest Rate Factors, set and guaranteed at the
beginning of the Term for the duration of the Term, which are applied to
changes in the Standard & Poor's 500 Composite Stock Price Index ("S&P
Index") using a formula set forth in the Certificate.
If the publication of the S&P Index is discontinued or the calculation of the
S&P Index is changed substantially, Keyport will substitute a suitable index.
Index Increases, if any, are based on a percentage (Participation Rate) of
the percentage increase in the S&P Index since the beginning of the Term.
Index Increases are calculated and credited proportionately over the selected
Term on each Index Sub-Account Anniversary. The total Index Increases that
may be applied to an Index Sub-Account during a Term are subject to a Cap and
Floor, both of which are set and guaranteed at the beginning of the Term.
(See "Index Sub-Account", page ___.)
If there is no Floor or the Floor is less than zero, and the S&P Index at the
first Sub-Account Anniversary is less than it was at the beginning of the
Term, an Index Decrease is applied to the Indexed Value of the Sub-Account.
If there is no Floor or the Floor is less than zero, and the S&P Index at the
first Sub-Account Anniversary is equal to or higher than it was at the
beginning of the Term, an Index Decrease will never be applied to the Indexed
Value during that Term. Index Decreases are calculated using the same
formula as Index Increases except that the Floor may limit the amount of any
decrease. The Participation Rate determines the percentage of the decrease
which is applied to the Indexed Value and that decrease is applied
proportionately over the selected Term. If there are subsequent Index
Increases, those increases are first offset by the amount of the Index
Decrease applied on each Sub-Account Anniversary. If on a subsequent Sub-
Account Anniversary the S&P Index value exceeds the S&P Index value at the
beginning of the Term, Index Decreases are no longer proportionately applied
to the Indexed Value over the remaining Term and only Index Increases are
credited going forward.
The amount of Index Increases credited to an Index Sub-Account may be more or
less than the amount of interest credited to an Interest Sub-Account.
Index Sub-Accounts also provide for a minimum value called the Surrender
Value to be used in certain circumstances instead of the Indexed Value to
calculate benefits. The Surrender Value of each Index Sub-Account in its
initial Term is equal to: 90% of the premium payment allocated to that Index
Sub-Account or 100% of the amount transferred (See "Transfers", page ___);
plus any Sub-Account Anniversary Adjustment in Surrender Value (as described
below); less any partial surrender. Interest is credited to the net amount at
an annual effective guaranteed rate of 3% per year. On each Sub-Account
Anniversary, additional interest, i.e., a "Sub-Account Anniversary Adjustment
in Surrender Value", is credited to an Index Sub-Account's Surrender Value,
so that the total interest credited to the Surrender Value during a Term will
at least be equal to the Index Increases credited to that Index Sub-Account.
The amount used to calculate death benefits, surrender amounts, and annuity
values of an Index Sub-Account will never be less than the Surrender Value.
If at the end of a Sub-Account Term the Indexed Value is less than the
Surrender Value of that Sub-Account, Keyport will credit interest to the Sub-
Account's Indexed Value so that it equals the Surrender Value. (See
"Surrender Value", page ___, "Index Sub-Accounts," page __.)
Initial and subsequent Terms of one to ten years may be available. Keyport
may discontinue offering Terms of certain durations or offer Terms of other
durations from time to time. The Terms offered for Initial Terms may differ
from the Terms available upon renewal. The Guaranteed Interest Rate Factors
declared by Keyport may vary depending on the duration of the Term. Keyport
should be contacted to determine the Terms currently being offered.
Factors in Determining the Declared Rate And Guaranteed Interest Rate Factors
The level of the Declared Rate for an Interest Sub-Account and the Guaranteed
Interest Rate Factors for Index Sub-Accounts set by Keyport will depend on a
variety of factors, including the interest rates generally available on the
types of instruments in which Keyport will invest Certificate Owners' premium
payments, the duration of the Term, regulatory and tax requirements, sales
commissions and expenses borne by Keyport, general economic trends, and
competitive factors.
Risk
IF THERE IS NO FLOOR OR THE FLOOR IS LESS THAN ZERO AND THE S&P INDEX AT THE
FIRST SUB-ACCOUNT ANNIVERSARY IS LESS THAN IT WAS AT THE BEGINNING OF THE
TERM, THE INDEXED VALUE OF AN INDEX SUB-ACCOUNT AT THE END OF THE FIRST YEAR
COULD BE LESS THAN PREMIUM. THEREAFTER, INCREASES IN THE S&P INDEX WILL
PRODUCE INDEX INCREASES THAT ARE FIRST USED TO OFFSET ANY PRIOR INDEX
DECREASES AT ANY ONE OR ALL SUB-ACCOUNT ANNIVERSARIES. (SEE "APPENDIX A",
ILLUSTRATION NO. 3)
Any payment or benefit, interest at the Declared Rate, and Index Increases
credited to Certificate Owner's Sub-Accounts are based on guarantees made by
Keyport. The initial and subsequent Declared Rate and Guaranteed Interest
Rate Factors apply to the original principal sum and reinvested earnings.
A partial surrender made during a Term will result in the loss of that
portion of previously calculated, but not credited, Index Increases
attributable to the amount surrendered, because Index Increases are credited
and vested over the duration of the Term.
KEYPORT'S MANAGEMENT MAKES THE FINAL DETERMINATION AS TO DECLARED RATE AND
GUARANTEED INTEREST RATE FACTORS TO BE DECLARED. KEYPORT CANNOT PREDICT OR
GUARANTEE FUTURE RATES AND FACTORS.
Renewal of Terms
At the end of each Index Sub-Account Term, a subsequent Term of the same
duration will begin subject to the new Term's Guaranteed Interest Rate
Factors. However, within the thirty (30) day period before the end of the
Term, the Certificate Owner may instruct Keyport otherwise. The Certificate
Owner will have the opportunity to transfer the Indexed Value to an Interest
Sub-Account or choose an Index Sub-Account that has a Term of any duration
then offered (See "Renewal Terms", page ___) except that no renewal will be
allowed into a Term that extends beyond the Income Date or the maximum date
allowed following the death of the Certificate Owner, Joint Owner, or
Annuitant where the Certificate Owner is a non natural person. (See "Death
Provisions", page___.)
Surrenders: Partial or Total
Subject to certain restrictions, partial and total surrenders of a
Certificate Owner Account are permitted.
PARTIAL SURRENDERS ARE NOT ALLOWED IF YOU HAVE CHOSEN AN INDEX SUB-ACCOUNT
AND THE CERTIFICATE IS ISSUED UNDER A CORPORATE OR KEOGH QUALIFIED PLAN THAT
IS ESTABLISHED PURSUANT TO THE PROVISIONS OF SECTION 401 OF THE INTERNAL
REVENUE CODE.
The minimum partial surrender amount is $250. After a partial surrender,
there must be at least $4,000 Combined Surrender Value remaining in the
Certificate. Each Index Sub-Account must maintain a minimum balance of
$1,000 Surrender Value. There is no minimum balance for an Interest Sub-
Account.
Transfers
Any portion of the values of an Interest Sub-Account may be transferred to
establish a new Index Sub-Account at any time before the Income Date. The
minimum amount that may be transferred from an Interest Sub-Account to an
Index Sub-Account is $1,000.
The values of an Index Sub-Account may be transferred to an Interest Sub-
Account only at the end of the Index Sub-Account's Term. (See "Transfer of
Values", page ___.)
Deferral of Payment
Keyport may defer payment of any partial or total surrender for a period not
exceeding six (6) months from the date of receipt of a request for surrender
or for the period permitted by state insurance law, if less. A deferral of
payment for a period greater than thirty (30) days would occur only under
highly unusual circumstances. (See "Surrender Procedures", page ___).
Annuity Period
On the Income Date, Keyport will pay the designated Annuitant a series of
annuity payments under an Annuity Option. The Annuity Option selected
determines the timing and basis of the annuity payments. (See "Annuity
Payment Provisions", page ___.)
Death Benefit
The Certificate provides for a death benefit if the Certificate Owner dies
before the Income Date or if the Annuitant dies before the Income Date and
the Certificate Owner is not a natural person. Within ninety (90) days of
the date of such death, the Designated Beneficiary may surrender the
Certificate to Keyport for the sum of the Accumulated Value of an Interest
Sub-Account, if any, plus the greater of: (a) the Indexed Value as adjusted
for any proportionate credit for prior Index Increases and any partial
surrenders (see "Death Provisions", page ___) or (b) the Surrender Value, for
all Index Sub-Accounts, if any. If the Floor is greater than zero, (a) is
the Indexed Value as of date of death less any subsequent partial surrenders.
For surrenders more than ninety (90) days after the date of death and for
surrenders following the death of a Joint Certificate Owner, the Surrender
Value of the Interest and Index Sub-Account(s), will be payable instead.
Premium Taxes
Keyport deducts the amount of any premium taxes levied by any State or
governmental entity when the premium tax is actually paid, unless Keyport
elects to defer such deduction until the time of surrender or the Income
Date. It is not possible to describe precisely the amount of premium tax
payable on any transaction. Such premium taxes depend, among other things,
on the type of Certificate (Qualified or Non-Qualified), on the state of
residence of the Certificate Owner or participant, the state of residence of
the Annuitant, the status of Keyport within such states, and the insurance
tax laws of such states. Currently such premium taxes range from 0% - 5.0%.
For a schedule of such taxes, see Appendix C, at page of this Prospectus.
Annual Reports to Certificate Owners
At least once each Certificate Year, Keyport sends each Certificate Owner a
report showing for each Sub-Account with values at any time during the year,
the following values:
i) for an Interest Sub-Account, the Surrender Value and
Accumulated Value at the beginning and end of the Certificate Year;
the amount of any surrenders, transfers, and interest credits
during the Certificate Year; and any premium payments allocated to
an Interest Sub-Account during the Certificate Year.
(ii) for each Index Sub-Account, the Surrender Value and Indexed
Value at the beginning and end of the Certificate Year; the amount
of any surrenders during the year; the S&P Index value as of the
most recent Sub-Account Anniversary and the Index Increase or Index
Decrease, if any, during the Certificate Year.
<PAGE>
TABLE OF CONTENTS
SUMMARY
GLOSSARY OF SPECIAL TERMS
DESCRIPTION OF CONTRACTS AND CERTIFICATES
A. Ownership
B. Enrollment Form and Premium Payments
C. Accumulation Period
1. General
2. Interest Sub-Account
3. Index Sub-Accounts
4. Risk Considerations
5. Surrenders
6. Dollar Cost Averaging Programs . . . . . . . . . . .
7. Transfer of Values
8. Premium Taxes
9. Death Provisions
D. Annuity Payment Provisions . . . . . . . . . . . . . . . . . .
1. Annuity Benefits
2. The Income Date and Form of Annuity
3. Change of Annuity Option
4. Annuity Options
5. Frequency and Amount of Payments
6. Proof of Age, Sex, and Survival of Annuitant
INVESTMENTS BY KEYPORT
AMENDMENT OF CERTIFICATE
ASSIGNMENT OF CERTIFICATE
DISTRIBUTION OF CERTIFICATE
TAX CONSIDERATIONS
A. General
B. Taxation of Keyport
C. Taxation of Annuities in General
1. General
2. Surrender, Assignments, and Gifts
3. Annuity Payments
4. Penalty Tax
5. Income Tax Withholding
6. Section 1035 Exchanges
D. Qualified Plans
1. Tax-Sheltered Annuities
2. Individual Retirement Annuities
3. Corporate Pension and Profit-Sharing Plans
<PAGE>
TABLE OF CONTENTS (continued)
Page
THE COMPANY
A. Business
1. General......................................................
2. Recent Developments.........................................
B. Selected Financial Data......................................
C. Management's Discussion and
Analysis of Results of Operations
and Financial Condition....................................
1. Results of Operations.......................................
2. Financial Condition.........................................
3. Investment Management.......................................
4. Liquidity...................................................
5. Effects of Inflation........................................
D. General Account Investments.................................
E. Competition.................................................
F. Employees...................................................
G. Regulation..................................................
COMPANY MANAGEMENT..............................................
EXECUTIVE COMPENSATION TABLES AND INFORMATION...................
LEGAL PROCEEDINGS...............................................
EXPERTS.........................................................
CHANGE IN ACCOUNTANTS...........................................
LEGAL MATTERS...................................................
FINANCIAL STATEMENTS............................................
APPENDIX A (FORMULA FOR INDEX INCREASES
AND/OR DECREASES, AND ILLUSTRATION OF INDEX
INCREASES AND INDEX DECREASES)
APPENDIX B (CALCULATION OF THE DEATH BENEFIT)
APPENDIX C (SCHEDULE OF STATE PREMIUM TAXES)
APPENDIX D (TELEPHONE INSTRUCTIONS)
<PAGE>
GLOSSARY OF SPECIAL TERMS
The following terms in this Prospectus have the indicated meanings:
Accumulated Value The value of an Interest Sub-Account, equal to all
allocations or transfers to an Interest Sub-Account, less all amounts
transferred or surrendered from an Interest Sub-Account, plus all interest
credited to an Interest Sub-Account. (See "Interest Sub-Account").
Allocated Certificate A Certificate under which amounts are allocated or
credited to the account of one individual participant.
Annuitant The natural person upon whose life annuity payments are based and
to whom any annuity payments will be made starting on the Income Date.
Annuity Options Options available for annuity payments.
Cap The maximum percentage by which the Indexed Value of an Index Sub-Account
may increase during a single Term.
Certificate The document issued to each Certificate Owner evidencing his or
her interest in the Group Annuity Contract. The term Certificate also
includes any Group Contract and any Individual Contract, unless the context
requires otherwise.
Certificate Anniversary, Certificate Year A continuous twelve-month period
commencing on the Certificate Date and each anniversary thereof.
Certificate Date The date a Certificate is issued and the Certificate Owner's
rights and benefits begin.
Certificate Owner Such person, persons, or entity who are entitled to the
ownership rights stated in the Certificate and in whose name(s) the
Certificate is issued.
Certificate Owner Account The Account established under a Certificate for all
of the values attributable to a Certificate Owner and accounted for
separately by Certificate Owner Sub-Accounts.
Certificate Owner Sub-Account The accounting method used to value and
maintain records of each Certificate Owner's values under a Certificate.
Interest and/or Index Sub-Account(s) are established by Keyport for a
Certificate Owner under which the Initial Premium and any Subsequent Premium
paid by or on behalf of a Certificate Owner or transfers are recorded.
Contract Owner The person, persons, or entity entitled to the ownership
rights stated in a Group or Individual Contract and in whose name(s) the
Contract is issued.
Designated Beneficiary The person who may be entitled to receive benefits
following the death of the Annuitant, the Certificate Owner, or the Joint
Certificate Owner. The Designated Beneficiary will be the first person among
the following who is alive on the date of death: Certificate Owner, Joint
Certificate Owner, Primary Beneficiary, Contingent Beneficiary, and,
otherwise, the Certificate Owner's estate. If the Certificate Owner and
Joint Certificate Owner are both alive, they will together constitute the
Designated Beneficiary.
Enrollment Form A document signed by a participant that serves as his or her
application for participation under an Allocated Certificate.
Floor If the Floor is a positive number or zero, it represents the minimum
percentage by which the Indexed Value of an Index Sub-Account may increase
during a single Term. If the Floor is a negative number or there is no
Floor, it represents the maximum percentage by which the Indexed Value of an
Index Sub-Account may decrease during a single Term.
General Account Keyport's general investment account which contains all of
Keyport's assets, except those in separate accounts.
Declared Rate The rate of interest declared and guaranteed by Keyport at the
beginning of each calendar month which is used to calculate the interest to
be credited to an Interest Sub-Account.
Guaranteed Interest Rate The rate of interest which when compounded will
equal an annual rate of 3%.
Guaranteed Interest Rate Factors The Participation Rate, Cap, and Floor,
which are set and guaranteed by Keyport at the beginning of each Term of an
Index Sub-Account and used to calculate Index Increases and Index Decreases
under a formula set forth in the Certificate and described in Appendix A.
Income Date The date on which annuity payments to an Annuitant are to begin.
The Income Date is the Annuitant's 90th birthday unless state law requires an
earlier date.
Income Value The sum under a Certificate of the Accumulated Value for an
Interest Sub-Account and the Indexed Value in each Index Sub-Account on the
Income Date.
Index Decrease A negative adjustment of Indexed Value which is calculated
using the Guaranteed Interest Rate Factors as applied to percentage changes
in the S&P Index. This can only occur if there is no Floor or the Floor is
less than zero and the S&P Index value on the first Sub-Account Anniversary
of a Term is lower than it was at the beginning of the Term.
Index Increase Interest credited to an Index Sub-Account, which is calculated
using the Guaranteed Interest Rate Factors as applied to percentage changes
in the S&P Index.
Index Sub-Account A Certificate Owner Sub-Account to which Keyport applies
Index Increases and Index Decreases.
Indexed Value The value of an Index Sub-Account, equal to all allocations,
transfers from the Interest Sub-Account to establish the Index Sub-Account,
or renewals of that Index Sub-Account, plus all Index Increases credited to
the Index Sub-Account, or less Index Decreases if the Floor is less than zero
or there is no Floor, plus any End-Of-Term Adjustments, less all amounts
surrendered from the Index Sub-Account.
Individual Certificate A Certificate issued to a natural person or a trustee
as Certificate Owner.
In Force The status of a Certificate before the Income Date, so long as it is
not totally surrendered and there has not been a death of the Annuitant or
any Certificate Owner that would cause the Certificate to end within, at
most, five (5) years from the date of death.
Initial Premium The premium payment which must be submitted with the
application for a Certificate.
Interest Sub-Account The Certificate Owner Sub-Account to which Keyport
credits interest based on a monthly declared and guaranteed rate of interest.
Each Certificate Owner has one Interest Sub-Account.
Joint Certificate Owner Any person designated by the Certificate Owner
jointly to possess rights in the Certificate Owner Account. Keyport requires
that the Certificate Owner and any Joint Certificate Owner act together.
Non-Allocated Certificate A Certificate under which a single account is
established on behalf of all participants in a particular plan of an employer
or other eligible entity on a non-allocated basis.
Non-Qualified Certificate Any Certificate that is not issued under a
Qualified Plan.
Office Keyport's executive office, which is at 125 High Street, Boston,
Massachusetts 02110.
Participation Rate The percentage of the percentage increase or decrease in
the S&P Index used in the formula to calculate Index Increases or Index
Decreases.
Qualified Certificate Any Certificate issued under a Qualified Plan.
Qualified Plan A retirement plan established pursuant to the provisions of
Sections 401, 403 and 408 of the Internal Revenue Code of 1986, as amended,
and HR-10 Plans for self-employed persons.
S&P Index Standard & Poor's 500 Composite Stock Price Index, also referred to
as the "S&P 500 Index" and "S&P 500" which is used to calculate Index
Increases and Index Decreases.
Sub-Account Year, Sub-Account Anniversary A continuous twelve-month period
commencing on the date that an Index Sub-Account is opened by allocation,
transfer, or renewal and each anniversary thereof, including the end of any
applicable Term of an Index Sub-Account.
Subsequent Premium Any premium payment made after the Initial Premium is
submitted.
Surrender Value The guaranteed minimum value of each Sub-Account, calculated
as described in this Prospectus. The Surrender Values of an Interest Sub-
Account and Index Sub-Accounts are calculated separately by differing
formulas. The sum of the Surrender Values in an Interest Sub-Account and the
Index Sub-Account(s) is referred to as the Combined Surrender Value.
Term The period for which Guaranteed Interest Rate Factors are used to
calculate Index Increases or Index Decreases for an Index Sub-Account. Terms
may be selected by a Certificate Owner from among those offered by Keyport.
Written Request A written request in a form satisfactory to Keyport, signed
by the Certificate Owner, and received at Keyport's Office.
<PAGE>
DESCRIPTION OF CONTRACTS AND CERTIFICATES
A. OWNERSHIP
The Certificate Owner is the individual or legal entity that has the power to
exercise the rights of an owner under the Certificate. The Certificate Owner
is the person or entity designated in the application for a Certificate or
the individual so designated in the Enrollment Form for an Allocated
Certificate.
The Certificate Owner may exercise all rights summarized in the Certificate.
Joint Certificate Owners are permitted but not contingent Certificate Owners.
Prior to the Income Date, the Certificate Owner together with any Joint
Certificate Owner may, by Written Request, change the Certificate Owner,
Joint Certificate Owner, Beneficiary, Contingent Beneficiary, Contingent
Annuitant, or in certain instances, the Annuitant. An irrevocably-named
person may be changed only with the written consent of such person.
Because a change of Certificate Owner by means of a gift (i.e., a transfer
without full and adequate consideration) may be a taxable event, a
Certificate Owner should consult a competent tax advisor as to the tax
consequences resulting from such a transfer.
Any Qualified Certificate may have limitations on transfer of ownership. A
Certificate Owner should consult a competent tax advisor as to the tax
consequences resulting from such a transfer.
B. ENROLLMENT FORM AND PREMIUM PAYMENTS
The Initial Premium is due on the Certificate Date. The Initial Premium may
not be less than $5,000. There is a maximum of $500,000 for the Initial
Premium. Payments of $500,000 or more require Keyport approval. Certificate
Owners may purchase multiple Certificates, although Keyport reserves the
right to limit the total premiums paid on multiple Certificates with respect
to any one Certificate Owner. Keyport may reject any premium payment.
The Initial Premium is credited to a Certificate Owner Account, which is
established on the date of receipt of a properly completed application or
Enrollment Form along with the required premium payment. Keyport will issue
a Certificate and confirm the receipt of the Initial Premium in writing. If
the Certificate is issued on a Non-Allocated basis, a single Certificate
Owner's Account is opened for the Certificate Owner. A Certificate Owner
Account starts earning interest on the day following the date the Certificate
Owner account is established on his or her behalf. A Certificate Owner may
choose to allocate the Initial Premium to an Interest Sub-Account and/or one
or more Index Sub-Accounts, as described below.
In the event Keyport determines that an application or Enrollment Form is not
properly completed, Keyport will attempt to contact the Certificate Owner by
letter or telephone to obtain the information necessary to complete the form.
Keyport will return the Initial Premium and any improperly completed
application or Enrollment Form, along with the corresponding premium payment,
which cannot be properly completed within three weeks of its receipt.
Keyport will permit others to act on behalf of an applicant in certain
instances, including the following two examples. First, Keyport will accept
an application for a Certificate that contains a signature signed under a
power of attorney, if a copy of that power of attorney is submitted with the
application. Second, Keyport will issue a Certificate that is replacing an
existing life insurance or annuity policy that was issued by either Keyport
or an affiliated company without having previously received a signed
application from the applicant. Certain dealers or other authorized persons
such as employers and Qualified Plan fiduciaries will inform Keyport of an
applicant's answers to the questions in the application by telephone or by
order ticket and cause the Initial Premium to be paid to Keyport. If the
information is in good order, Keyport will issue the Certificate with a copy
of an application completed with that information. The Certificate will be
delivered to the Certificate Owner with a letter from Keyport that will give
the Certificate Owner an opportunity to respond to Keyport if any of the
application information is incorrect. Alternatively, Keyport's letter may
request the Certificate Owner to confirm the correctness of the information
by signing either a copy of the application or a Certificate delivery receipt
that ratifies the application in all respects. (In either case, a copy of
the signed document would be returned to Keyport for its permanent records.)
All purchases are confirmed, in writing, to the applicant by Keyport.
Keyport's liability extends only to purchases so confirmed.
Eligible individuals may make Subsequent Premium payments; the minimum and
maximum of which are $1,000 and $100,000 respectively. Subsequent Premium
Payments may not be made after the first Certificate Year if the Annuitant's
age is within 10 years of the Income Date. Subsequent Premium will be
allocated to Sub-Accounts based on the Certificate Owner's instructions. In
the absence of instruction, the Subsequent Premium will be added to an
Interest Sub-Account.
C. ACCUMULATION PERIOD
1. General
This Certificate consists of a series of Sub-Accounts, including a single
Interest Sub-Account and multiple Index Sub-Accounts. A new Index Sub-
Account is created every time a premium payment is allocated or a transfer is
made to establish a new Index Sub-Account. All benefits under this
Certificate are calculated by first calculating the appropriate value of each
Sub-Account and then aggregating all Sub-Account values to get the values of
a Certificate Owner Account.
Amounts allocated to an Interest Sub-Account will earn interest and amounts
allocated to an Index Sub-Account may earn Index Increases.
2. Interest Sub-Account
Any amount allocated to an Interest Sub-Account will earn interest at a rate
calculated and credited daily based on the Declared Rate. The Declared Rate
is an annual effective interest rate that will be credited when daily
interest credits have compounded for a full year. The Declared Rate is set
by Keyport on the first business day of each calendar month and is guaranteed
for that month. The Declared Rate will never be less than a rate which when
compounded will equal a 3% annual rate. Thus, the Declared Rate has a
guaranteed component and may include interest in excess of the guaranteed
component.
The determination of the Declared Rate will be reflective of interest rates
generally available on the types of investments in which Keyport intends to
invest the proceeds attributable to Certificate Owner Interest Sub-Accounts.
(See "Investments by Keyport".) In addition, Keyport's management may
consider various other factors in determining Declared Rates for a given
period, including regulatory and tax requirements, sales commissions and
administrative expenses borne by Keyport, general economic trends, and
competitive factors. KEYPORT'S MANAGEMENT WILL MAKE THE FINAL DETERMINATION
AS TO THE DECLARED RATE.
An Interest Sub-Account will have an Accumulated Value and a Surrender Value.
The Accumulated Value is equal to the Initial and Subsequent Premiums
allocated to an Interest Sub-Account plus any transfers to an Interest Sub-
Account, less amounts transferred or surrendered from an Interest Sub-
Account. Interest at the Declared Rate is credited to this net amount.
The Accumulated Value is available only during three time periods. First, as
a surrender payable if all or part of an Interest Sub-Account is surrendered
within the first 5 days of any calendar month. Second, as a Death Benefit
that is payable if the Certificate is surrendered within 90 days after the
date of certain deaths. Third, as a value applied on the Income Date to
determine the amount of income payments. At all other times, the Surrender
Value is available while the Certificate is In Force.
The Surrender Value at any time is equal to 90% of the Initial and
Subsequent Premiums allocated to an Interest Sub-Account plus any Surrender
Values transferred to this Sub-Account from any Index Sub-Account less
Surrender Values transferred or surrendered from this Sub-Account. Interest,
both guaranteed and excess, is credited to this net amount.
Guaranteed interest is credited daily at a rate which when compounded will
equal a 3% annual rate.
Excess interest is the excess, if any, of interest credited to the
Accumulated Value over interest credited to the Surrender Value from the last
date of excess interest credits to the current date. Excess interest is
added on the first of each calendar month plus on any date of a transfer or
surrender from this Sub-Account.
On each Certificate Anniversary within 10 years of the Income Date, if the
Accumulated Value exceeds the Surrender Value, then the Surrender Value will
be increased by 1% of the Accumulated Value, but not to an amount greater
than the Accumulated Value.
3. Index Sub-Accounts
Multiple Index Sub-Accounts may be open at any time. Each Index Sub-Account
that is open will have its own Term, Participation Rate, Cap, Floor and
values. All of the descriptions below are for a single Index Sub-Account.
All activities that are described herein relate to activities within a
specific Index Sub-Account (i.e., a partial surrender describes a partial
surrender from a particular Index Sub-Account).
An Index Sub-Account will have an Indexed Value and a Surrender Value. The
Indexed Value is available only during three time periods. First, as a
surrender payable if the Index Sub-Account is surrendered within 45 days
after the end of its Term. Second, as a Death Benefit that is payable if the
Certificate is surrendered within 90 days after the date of certain deaths.
Third, as an amount applied on the Income Date to determine the amount of
income payments. At all other times, the Surrender Value is available while
the Certificate is In Force.
The Indexed Value is equal to the premium payment allocated to or the
Accumulated Value transferred to the Index Sub-Account, plus or minus any
Index Increase or Index Decrease, plus End-Of-Term Adjustments less any
partial surrenders.
Index Increases are determined on each Sub-Account Anniversary using the S&P
Index and the Participation Rate, Floor and Cap. This calculation may result
in an Index Decrease only if there is a reduction in the S&P Index on the
first Sub-Account Anniversary of a Term and there is no Floor or the Floor is
less than zero. Any Index Increase or Index Decrease will be proportionately
spread over the remainder of the Term (See "Appendix A").
Keyport will calculate and apply Index Increases and Index Decreases to a Sub-
Account at each Sub-Account Anniversary after the start of a Term. The
Certificate contains a formula for using the S&P Index and the Guaranteed
Interest Rate Factors established at the beginning of the Term to calculate
the Index Increases and Index Decreases on each Sub-Account Anniversary in
the Term. All Index Increases and Index Decreases are applied to the Sub-
Account proportionately over the entire Term. Thus, an Index Increase or
Index Decrease attributable to the first year in a five year Term will be
applied over the first to fifth years in equal amounts. (See "Appendix A",
Illustration 1-6), except that following an Index Decrease, if the S&P Index
on any subsequent Sub-Account Anniversary in a Term, exceeds the S&P Index at
the beginning of the Term, Index Decreases will no longer be applied.
The first part of the formula calculates the proportionate credit for any
increase in the S&P Index from its prior highest Sub-Account Anniversary
value to its new highest value on the current Sub-Account Anniversary. The
second part determines the proportionate credit for any change in the S&P
Index occurring on a prior Sub-Account Anniversary(ies). The second part is
always zero on the first Sub-Account Anniversary in a Term.
THIS SECTION APPLIES IF THE FLOOR IS ZERO OR GREATER
At the first Sub-Account Anniversary of a Term, the Index Increase, if any,
is calculated by multiplying, (i) the Participation Rate by (ii) the change
in the S&P Index from the beginning of the Term to the first Sub-Account
Anniversary divided by its beginning of Term value. The result is then
divided by the number of years in the Term. This percentage is then
multiplied by the smaller of the Indexed Value at the beginning of the Term
and the Indexed Value (prior to the crediting of any Index Increases) on the
first Sub-Account Anniversary.
After the first Sub-Account Anniversary in any Term;
Part one is calculated as follows:
Multiply, (i) the Participation Rate by (ii) any increase in the S&P Index
from its prior highest Sub-Account Anniversary value to its current highest
Sub-Account Anniversary value divided by its beginning of Term value. The
result is then multiplied by the ratio of the number of completed Sub-Account
Years in the Term to the total number of Sub-Account Years in the Term. This
percentage is then multiplied by the smaller of the Indexed Value at the
beginning of the Term and the Indexed Value (prior to the crediting of any
Index Increases) on any Sub-Account Anniversary in the Term.
Part two is calculated as follows:
Multiply, (i) the Participation Rate by (ii) the percentage change in the S&P
Index since the beginning of the Term, calculated using the highest value
attained by the S&P Index at any Sub-Account Anniversary during the Term
excluding the value of the S&P Index at the beginning of the Term and on the
current Sub-Account Anniversary. Divide the resulting percentage by the
number of Sub-Account Years in the Term. This percentage is then multiplied
by the smaller of the Indexed Value at the beginning of the Term and the
Indexed Value (prior to the crediting of any Index Increases) on any Sub-
Account Anniversary in the Term.
THIS SECTION APPLIES IF THERE IS NO FLOOR OR THE FLOOR IS LESS THAN ZERO
At the first Sub-Account Anniversary of a Term, the Index Increase or the
Index Decrease is calculated by multiplying, (i) the Participation Rate by
(ii) the change in the S&P Index from the beginning of the Term to the first
Sub-Account Anniversary, divided by its beginning of Term value. The result
is then divided by the number of years in the Term. This percentage is then
multiplied by the smaller of the Indexed Value at the beginning of the Term
and the Indexed Value (prior to the crediting of any Index Increase or Index
Decrease) on the first Sub-Account Anniversary.
If there is no decrease in the S&P Index on the first Sub-Account Anniversary
of a Term, there will not be any Index Decreases during the Term.
After the first Sub-Account Anniversary, the following two-part calculation
is used to determine any Index Increases and proportionately distribute the
first year decrease, if any, and any subsequent increases over the remainder
of the Term.
Part one is calculated as follows:
Multiply, (i) the Participation Rate by (ii) any increase in the S&P Index
from its prior highest Sub-Account Anniversary value to its current highest
Sub-Account Anniversary value divided by its beginning of Term value. The
result is then multiplied by the ratio of the number of completed Sub-Account
Years in the Term to the total number of Sub-Account Years in the Term. This
percentage is then multiplied by the smaller of the Indexed Value at the
beginning of the Term and the Indexed Value (prior to the crediting of any
Index Increases) on any Sub-Account Anniversary in the Term.
Part two is calculated as follows:
Multiply, (i) the Participation Rate by (ii) the percentage change in the S&P
Index since the beginning of the Term, calculated using the highest value
attained by the S&P Index at any Sub-Account Anniversary during the Term
excluding the value of the S&P Index at the beginning of the Term and on the
current Sub-Account Anniversary. Divide the resulting percentage by the
number of Sub-Account Years in the Term. This percentage is then multiplied
by the smaller of the Indexed Value at the beginning of the Term and the
Indexed Value (prior to the crediting of any Index Increases or Index
Decreases) on any Sub-Account Anniversary in the Term.
THIS SECTION APPLIES IN ALL INSTANCES
Any Index Increases calculated above may be reduced if the Cap is applicable
and increased if a Floor in excess of zero is applicable. Index Decreases
may be reduced if a Floor is applicable. The sum of the two parts of the
formula equals the total amount that is added to the Sub-Account Indexed
Value. If the S&P Index on each Sub-Account Anniversary in a Term is less
than the S&P Index at the beginning of the Term, there will not be any Index
Increases credited during the Term, and there will be an Index Decrease if
there is no Floor or the Floor is less than zero.
In the event the S&P Index increases on a Sub-Account Anniversary during a
Term, the effect of this formula is to provide that, in the absence of any
Index Decreases or any partial or total surrender during a Term, the total
Index Increases, if any, credited to an Index Sub-Account during a Term will
equal the Sub-Account Indexed Value at the beginning of the Term multiplied
by a percentage (Participation Rate) of the percentage increase in the S&P
Index since the beginning of the Term (subject to the Cap and the Floor),
using the highest value attained by the S&P Index on any Sub-Account
Anniversary in the Term, excluding the value of the S&P Index at the
beginning of the Term and on the current Sub-Account Anniversary.
In the event the S&P Index value decreases on the first Sub-Account
Anniversary of a Term, the effect of this formula is to provide that, in the
absence of any subsequent Index Increases or any partial or total surrender
during a Term, the total Index Decreases, if any, applied to an Index Sub-
Account during a Term will equal the Indexed Value at the beginning of the
Term multiplied by a percentage (Participation Rate) of the percentage
decrease in the S&P Index since the beginning of the Term (subject to the
Floor), using the value attained by the S&P Index on the first Sub-Account
Anniversary of a Term.
Partial surrenders in excess of Index Increases or Index Decreases will
reduce the amount of the Index Increases or Index Decreases credited after
such surrender, but do not affect the portion of Index Increases or Index
Decreases previously applied.
Total Index Increases credited to an Index Sub-Account may be more or less
than the amount of interest credited to an Interest Sub-Account established
at the same time, depending on the change in the S&P Index and the Guaranteed
Interest Rate Factors over the course of the Term.
The formula may produce Index Increases or Index Decreases to the Indexed
Value, or the Indexed Value may remain unchanged. Over time, the Indexed
Value of an Index Sub-Account may be less than the Surrender Value of that
same Index Sub-Account. In those circumstances, the Surrender Value is used
to calculate any benefit payable under the Certificate. In addition, if at
the end of a Term, the Indexed Value of an Index Sub-Account is less than the
Surrender Value of that Sub-Account, Keyport will credit the Indexed Value
with an End of Term Adjustment equal to the excess of the Surrender Value
over the Indexed Value.
The Surrender Value of an Index Sub-Account at any time is equal to the
initial Surrender Value plus any Sub-Account Anniversary Adjustments (defined
below), less any partial surrenders. Interest is credited to the net amount
at an annual effective rate of 3%.
A Sub-Account Anniversary Adjustment occurs when the Indexed Value and the
Surrender Value are compared on each Sub-Account Anniversary. If (a) the
Indexed Value exceeds the Surrender Value and (b) the total to date of all
Index Increases or Index Decreases applied during the Term exceed "all
increases in the Surrender Value during the Term", then the Surrender Value
will be increased by the difference between the two amounts in (b). "All
increases in the Surrender Value during the Term" equal the total to date
during the Term of all prior Sub-Account Anniversary Adjustments to the
Surrender Value and all interest credited to the Surrender Value (the
interest for each Sub-Account equals: the Surrender Value at the end of the
Sub-Account year plus the amount of any partial surrender(s) during the Sub-
Account year, less the Surrender Value at the start of the Sub-Account year).
After the above adjustment, on each Sub-Account Anniversary within 10 years
of the Income Date, if the Indexed Value exceeds the Surrender Value, then
the Surrender Value will be increased by the lesser of (a) and (b), where:
(a) is 1% of the Indexed Value multiplied by the number of elapsed
Sub-Account Anniversaries within this 10-year period, less any
prior increases that were made pursuant to this provision; and
(b) is the difference between the Indexed Value and the Surrender
Value.
The initial Surrender Value of an Index Sub-Account is equal to ninety
percent (90%) of the premium allocated to the Index Sub-Account if opened by
a premium payment, and one hundred percent (100%) of the Surrender Value
transferred to the Index Sub-Account if opened by a transfer.
Currently the index is the Standard & Poor's 500 Composite Stock Price Index
("S&P Index"). The S&P Index is a widely accepted and broad measure of the
performance of the major United States stock markets. The S&P Index is a
market value weighted measure of changes in the prices of the underlying
securities and does not reflect any stock dividend income on the underlying
securities. "S&Pr", "S&P 500r", and "Standard & Poor's 500" are trademarks
of The McGraw Hill Companies, Inc., and have been licensed for use by
Keyport. The Certificate is not sponsored, endorsed, sold, or promoted by
Standard & Poor's and Standard & Poor's makes no representation regarding the
advisability of purchasing the Certificate.
If the publication of the S&P Index is discontinued, or the calculation of
the S&P Index is changed substantially, Keyport will substitute a suitable
index and notify the Certificate Owner.
The formula used to calculate Index Increases and Index Decreases and
illustrative examples are set forth in Appendix A.
Renewal Terms. For Index Sub-Accounts, a new Term will begin automatically
at the end of a Term, unless a Certificate Owner elects a total surrender.
(See "Surrenders".) Prior to the end of each Term of each Index Sub-Account,
Keyport will notify the Certificate Owner of the durations available for the
next Terms. A Certificate Owner may choose from among the Terms offered by
Keyport at that time. Keyport may discontinue offering Terms of certain
durations currently available or offer Terms of different durations from time
to time. The then available Guaranteed Interest Rate Factors may vary based
on the duration of the Term selected and may differ from the rates currently
available for new Certificates. The Certificate Owner may not select a Term
for a period longer than the number of years remaining until the Income Date
or beyond the maximum date allowed following the death of a Certificate
Owner, Joint Certificate Owner, or Annuitant, if the Owner is a non-natural
person. If the selected Term exceeds these limits, Keyport will
automatically transfer the value of the Index Sub-Account to the Interest Sub-
Account.
The Indexed Value at the beginning of any subsequent Term will be equal to
the value at the end of the previous Term. In the absence of any partial or
total surrender or transfer (the effects of which are described below), the
Indexed Value will earn and be credited with any Index Increases for each
year in the subsequent Term, using the Guaranteed Interest Rate Factors
established at the beginning of the subsequent Term selected by the
Certificate Owner or established by default (as described above) in the
absence of other instructions. The Surrender Value at the beginning of any
subsequent Term will be equal in value to the Surrender Value at the end of
the prior Term. The Indexed Value at the beginning of a new Term can be
greater than or equal to, Surrender Value depending on Index Increases, Index
Decreases, and surrenders during the prior Term. As a result, the initial
Surrender Value for a new Term will be equal to or less than the initial
Indexed Value for the new Term bearing the same relationship between indexed
Value and Surrender as was determined at the end of the prior Term. For
example, if the Surrender Value was 95% of the Indexed Value at the end of
the prior Term, it will be 95% of the initial Indexed Value for the new Term.
Absent any partial surrenders in the prior Term, the initial Surrender Value
will never be less than 90% of the initial Indexed Value in the new Term.
Establishment of Guaranteed Interest Rate Factors. Guaranteed Interest Rate
Factors for initial and renewal Terms will be established periodically.
Keyport will declare Guaranteed Interest Rate Factors for the Term chosen at
the time of the initial purchase or at the time of renewal. Differing
Guaranteed Interest Rate Factors may be established for Terms of different
durations. Keyport also may offer differing Guaranteed Interest Rate Factors
for initial allocations, transfers, and renewal Terms.
Keyport has no specific formula for determining the Guaranteed Interest Rate
Factors that it will declare in the future. KEYPORT'S MANAGEMENT WILL MAKE
THE FINAL DETERMINATION AS TO GUARANTEED INTEREST RATE FACTORS TO BE
DECLARED. KEYPORT CANNOT PREDICT OR GUARANTEE FUTURE GUARANTEED INTEREST
RATE FACTORS.
Information on Renewal Rate Factors. A Certificate Owner is provided with a
toll-free number to call to inquire about Guaranteed Interest Rate Factors
for Terms then being offered. In addition, prior to the beginning of each
subsequent Term, Keyport will notify the Certificate Owner in writing of the
Terms available. Guaranteed Interest Rate Factors will be declared prior to
renewal. At the end of any Term, a Certificate Owner has the opportunity to
select any other duration of Term then being offered.
4. Risk Considerations
The interest rates and Index Increases credited to a Certificate Owner's
Account are based on guarantees made by Keyport. The initial and subsequent
Guaranteed Interest Rates and Guaranteed Interest Rate Factors apply to the
original principal sum and reinvested earnings. The amount of any Index
Increases credited to an Index Sub-Account may be more or less than the
amount of interest credited to an Interest Sub-Account. Moreover, it is
possible that an Index Decrease will be applied at each subsequent Index Sub-
Account Anniversary after the first if the S&P Index does not exceed its
beginning value on any subsequent Index Sub-Account Anniversary in a Term.
If the Floor established for a Term is less than zero, and the S&P Index is
lower on the first Sub-Account Anniversary than it was at the beginning of
the Term, it could result in an Indexed Value that is less than principal
(i.e., premium payments).
5. Surrenders
General.
A Certificate Owner may make a partial or total surrender of the Certificate
Owner's Account at any time prior to the Income Date while the Certificate is
In Force, subject to the conditions described below. Partial surrenders may
be requested from any specified Sub-Account, either an Interest Sub-Account
or any Index Sub-Account. Partial and total surrenders are not subject to a
surrender charge. However, the values available for surrender may differ
depending on the timing of the surrender. For example, in the Interest Sub-
Account, the Accumulated Value is available during the first five (5) days of
every month. At all other times, the Surrender Value is available. The
available value in an Index Sub-Account during the first forty-five (45) days
of a new Term is the greater of the Indexed Value and Surrender Value. After
forty-five (45) days, only the Surrender Value is available.
Partial Surrenders.
At any time prior to the Income Date, a Certificate Owner may make a Written
Request for a partial surrender. Partial surrenders may only be made if:
(i) the surrender request is at least $250;
(ii) the Surrender Value remaining in each Index Sub-Account after
the partial surrender has been made is at least $1,000; and
(iii) the Combined Surrender Value remaining in the Certificate
after the partial surrender has been made is at least $4,000.
If after complying with a request for a partial surrender there would be
insufficient value in the Certificate Owner Account to keep the Certificate
In Force, Keyport will treat the request as a request to surrender only the
excess amount over $4,000.
Notwithstanding the foregoing, Partial Surrenders are not allowed from the
Index Sub-Account(s) if the Certificate is issued under a Corporate or Keogh
Qualified Plan that is established pursuant to the provisions of Section 301
of the Internal Revenue Code.
Surrender Procedures.
In the event the Certificate Owner does not specify from which Sub-Account(s)
the partial surrender is to be taken, it will be withdrawn from Sub-Accounts
in the following order: from the Interest Sub-Account; then from any Index
Sub-Account where the Indexed Value is available, starting with the most
recently established Index Sub-Account; then from any Index Sub-Account where
the Indexed Value currently is not available, starting with the most recently
established Index Sub-Account.
Keyport has established these default procedures with the goal of minimizing
the adverse impact on Certificate Owners, but does not represent that the
order of surrenders will necessarily be the most favorable sequence for any
individual Certificate Owner. Factors such as the length of the Terms,
timing of the partial surrender, the Guaranteed Interest Rate Factors, and
the Indexed Value of each Sub-Account need to be evaluated by each
Certificate Owner in determining the appropriate Sub-Account from which to
take a partial surrender.
Total Surrenders.
The Certificate Owner may make a Written Request for a total surrender.
Surrendering the Certificate will end it. The Surrender Value will be
determined as of the date Keyport receives the Written Request for surrender.
Keyport will pay the Certificate Owner, as applicable, the Accumulated Value
or Surrender Value of the Interest Sub-Account and the Indexed Value or
Surrender Value of the Index Sub-Account(s), less a deduction for any premium
taxes not previously paid. For any total surrender made after the first
Certificate Year, the Certificate Owner may receive the values under an
Annuity Option, rather than in a lump sum.
Keyport will, upon request, inform a Certificate Owner of the amount payable
upon a partial or total surrender. Any partial or total surrender may be
subject to tax and tax penalties. (See "Tax Considerations".)
Keyport may defer payment of any partial or total surrender for a period not
exceeding six (6) months from the date the Written Request for surrender is
received, or any shorter period permitted by state insurance law. Only under
highly unusual circumstances will a surrender payment be deferred more than
thirty (30) days. While all circumstances under which deferral of surrender
payment might be involved are not be foreseeable at this time, such
circumstances could include, for example, a period of unusually high
surrender requests, accompanied by a radical shift in interest rates. If
Keyport decides to defer payment for more than thirty (30) days, the
Certificate Owner will be notified in writing of that decision.
6. Dollar Cost Averaging Programs
Keyport offers Dollar Cost Averaging Programs in which Certificate Owners may
participate by Written Request. The programs periodically transfer values
from the Interest Sub-Account to new Index Sub-Accounts of specific Terms
selected by the Certificate Owner. The programs allow a Certificate Owner to
allocate premium payments to Index Sub-Accounts over time rather than having
to invest in an Index Sub-Account all at once. The programs are available
for initial and subsequent Premium payments and for values transferred into
the Interest Sub-Account. Under the programs, Keyport makes automatic
transfers on a periodic basis out of the Interest Sub-Account to establish
one or more of the available Index Sub-Account Terms. The Certificate Owner
may not choose an Index Sub-Account with a Term that would extend beyond the
Income Date or the maximum date allowed following the death of a Certificate
Owner, Joint Owner, or Annuitant, if the Owner is a non-natural person.
Keyport reserves the right to limit the number of Index Sub-Account Terms the
Certificate Owner may choose but there are currently no limits.
Under the programs, each transfer from the Interest Sub-Account will be to a
new Index Sub-Account of a Term selected by the Certificate Owner which will
have declared Guaranteed Interest Rate Factors unique to that Sub-Account.
As described in "Establishment of Guaranteed Interest Rate Factors" these
factors are established periodically by Keyport and will be established prior
to each transfer. Because the Dollar Cost Averaging Programs are elected in
advance of Keyport's declaration of the Guaranteed Interest Rate Factors for
Index Sub-Accounts established under the programs, the Certificate Owner is
advised to contact Keyport prior to any transfer date to determine the
Guaranteed Interest Rate Factors applicable to the Certificate Owner's
planned transfer. The Certificate Owner may elect to terminate the programs
at any time.
Keyport offers two Dollar Cost Averaging programs:
i) Under the first program, The Certificate Owner by Written Request must
specify the amount (minimum $1,000) of each periodic transfer and the Index
Sub-Account Term(s) to which the transfers are to be made. Transfers will be
made until all values are transferred from the Interest Sub-Account. When
the value in the Interest Sub-Account reaches an amount that would leave,
after the current transfer, a remaining value that is less than the periodic
transfer amount, that remaining value is added to the current transfer and
allocated proportionally to the designated Index Sub-Account(s) and the
program will end, e.g., Certificate Owner has designated $1,000 to a 3 year
Term Index Sub-Account and $1,000 to a 5 year Term Index Sub-Account and has
$2,500 remaining in the Interest Sub-Account. The final transfer will be for
$1,250 to a 3 Year Term Index Sub-Account and $1,250 to a 5 year Term Index
Sub-Account.
ii) Under the second program, the Certificate Owner by Written Request must
specify the amount (minimum $1,000) of each periodic transfer, the duration
for which the periodic transfers are to be made (e.g., 15 months) and the
Index Sub-Account Term(s) to which the transfers are to be made.
The first transfer will occur on a particular date designated in advance by
Keyport (the "designated date") as long as notice of the Certificate Owner's
Written Request is received no later than five (5) business days prior to the
designated date. Each subsequent transfer will occur following the
designated date, e.g., if the frequency is monthly and the designated date is
the 10th of a month and the notice is received on April 2, the first transfer
will occur on April 10 and on the 10th of each successive month.
Before any final transfer, the Certificate Owner may extend program (i) by
allocating Subsequent Premium to the Interest Sub-Account or by transferring
the Indexed Value of any Index Sub-Account at the end of its Term to the
Interest Sub-Account.
Partial Surrenders from the Interest Sub-Account are allowed while a Dollar
Cost Averaging Program is in effect. The duration of either program may be
shortened by such Partial Surrenders.
The Certificate Owner may, by Written Request or by telephone, change the
periodic amount to be transferred, change the Index Sub-Account(s) Terms to
which the transfers are to be made, or end the program. The program will
automatically end if the Income Date occurs. Keyport reserves the right to
end the program at any time by sending the Certificate Owner a notice one
month in advance.
Written or telephone instructions must be received by Keyport by the end
(currently 4:00 PM Eastern Time) of the business day preceding the next
scheduled transfer in order to be in effect for that transfer. Telephone
instructions are subject to the conditions and procedures established by
Keyport from time to time. The current conditions and procedures appear in
Appendix D, and Certificate Owners in a Dollar Cost Averaging Program will be
notified, in advance, of any changes.
7. Transfer of Values
The Certificate Owner may transfer account values between the Interest Sub-
Account and Index Sub-Accounts, subject to the following restrictions:
(a) all requests for transfers must be made before the Income Date
by telephone or by Written Request;
(b) the number of transfers may not exceed any limit Keyport may
set for a specified time period. Currently, Keyport does not limit
the number of permissible transfers in a single Certificate Year;
(c) all or part of an Interest Sub-Account (but not less than
$1,000) may be transferred to establish a new Index Sub-Account at
any time before the Income Date;
(d) a transfer from an Index Sub-Account to an Interest Sub-
Account must include the entire Indexed Value of the Sub-Account
and may only be made at the end of a Term;
(e) the Term of a new Index Sub-Account cannot be longer than the
number of years remaining until the Income Date or the date allowed
following the death of a Certificate Owner, Joint Certificate Owner
or Annuitant, if the Owner is a non-natural person.
While no charge currently applies to transfers, Keyport reserves the right to
charge $25 per transfer if a Certificate Owner makes more than 4 transfers in
a single Certificate Year. This restriction will not apply to Dollar Cost
Averaging Programs. Keyport reserves the right, at any time and without
prior notice, to terminate, modify, or suspend the transfer privileges
described above.
8. Premium Taxes
Keyport deducts the amount of any premium taxes levied by any state or
governmental entity when the premium tax is incurred, unless Keyport elects
to defer such deduction until the time of surrender or the Income Date. It
is not possible to describe precisely the amount of premium tax payable on
any transaction involving a Certificate. Such premium taxes depend, among
other things, on the type of Certificate (Qualified or Non-Qualified), on the
state of residence of the Certificate Owner, the state of residence of the
Annuitant, the status of Keyport within such states, and the insurance tax
laws of such states. Currently such premium taxes range from 0% to 5.0%.
For a schedule of such taxes, see Appendix C of this Prospectus.
9. Death Provisions
These provisions do not apply to Non-Allocated Certificates. In Non-Allocated
Certificates, Annuitants or payees are unknown until the Certificate Owner
requests that an annuity be effected.
(a) Non-Qualified Certificate
Death of a Certificate Owner, Joint Certificate Owner, or Certain Non-
Certificate Owner Annuitants. These provisions apply if, before the Income
Date while the Certificate is In Force, the Certificate Owner or any Joint
Certificate Owner dies (whether or not the decedent is also the Annuitant) or
the Annuitant dies under a Certificate with a non-natural Certificate Owner
such as a trust. The Designated Beneficiary will control the Certificate
Owner Account after such a death.
If the decedent was the Certificate Owner or the Annuitant (if the
Certificate Owner is not a natural person), the Designated Beneficiary may,
by the later of the 90th day after the death and the 60th day after Keyport
is notified of the death, surrender the Certificate Owner Account for the
death benefit on the date of surrender. The total death benefit is the sum of
the death benefit(s) of an Interest Sub-Account and each Index Sub-
Account(s). The death benefit of an Interest Sub-Account is equal to the
Accumulated Value of an Interest Sub-Account, i.e., (a) the portion of the
Initial Premium allocated to an Interest Sub-Account; plus (b) the portion of
any Subsequent Premium(s) allocated to the Interest Sub- Account; plus (c)
any amounts transferred to an Interest Sub-Account; less (d) any partial
surrender amounts from an Interest Sub-Account; less (e) any amounts
transferred from an Interest Sub-Account; plus (f) interest on the net amount
at the Declared Rate set on the first day of each calendar month and
guaranteed for that month.
The death benefit of each Index Sub-Account is the greater of the Death
Benefit and the Surrender Value. The Death Benefit is equal to (a) minus
(b), where (a) is the Indexed Value at the start of the Sub-Account Year in
which death occurs, with the applicable Index Increase recalculated as
described in Appendix B, and (b) is the sum of any partial surrenders since
the start of the Sub-Account Year. If the Floor is greater than zero, (a) is
"the Indexed Value as of the date of death, less any subsequent Partial
Surrender."
For a surrender after the applicable 90 or 60 day period and for a surrender
following the death of a Joint Certificate Owner, the Surrender Value is
payable instead.
If the decedent's surviving spouse (if any) is the sole Designated
Beneficiary, the surviving spouse will automatically become the new sole
Certificate Owner as of the decedent's date of death. If the decedent is the
Annuitant, the new Annuitant will be any living Contingent Annuitant named in
the application, otherwise the surviving spouse. The Certificate Owner
Account can stay in force until another death occurs (i.e., until the death
of the Annuitant, Certificate Owner, or Joint Certificate Owner). Except for
this paragraph, all of "Death Provisions" will apply to that subsequent
death.
In all other cases, the Certificate can stay In Force up to five (5) years
from the date of death. During this period, the Designated Beneficiary may
exercise all ownership rights, including the right to make transfers or
partial surrenders or the right to totally surrender the Certificate pursuant
to the surrender provisions of the Certificate. If the Certificate is still
In Force at the end of the five-year period, Keyport will automatically end
it by paying to the Designated Beneficiary the Surrender Value. If the
Designated Beneficiary is not alive then, Keyport will pay any Person(s)
previously named by the Designated Beneficiary in a Written Request,
otherwise the Designated Beneficiary's estate.
Payment of Benefits. Instead of receiving a lump sum, the Certificate Owner
or any Designated Beneficiary may, by Written Request, direct Keyport to pay
any benefit of $5,000 or more under an Annuity Option that meets the
following requirements: (a) the first payment to the Designated Beneficiary
must be made no later than one (1) year after the date of death; (b) payments
must be made over the life of the Designated Beneficiary or over a period not
extending beyond that person's life expectancy; and any Annuity Option that
provides for payments to continue after the death of the Designated
Beneficiary will not permit the successor payee to extend the period of time
over which the remaining payments are to be made. The Certificate Owner may
also direct that any benefit payable to a Designated Beneficiary be paid
under an Annuity Option meeting these same requirements.
Death of Certain Non-Certificate Owner Annuitants. The following provisions
apply if, before the Income Date while the Certificate is In Force, (a) the
Annuitant dies, (b) the Annuitant is not a Certificate Owner, and (c) the
Certificate Owner is a natural person: The Certificate will continue In
Force after the Annuitant's death. The new Annuitant will be any living
Contingent Annuitant, otherwise the Certificate Owner.
(b) Qualified Certificates
Death of Annuitant. If the Annuitant dies while the Certificate is In Force,
the Designated Beneficiary will thereafter control the Certificate. The
Designated Beneficiary may by the later of the 90th day after the death and
the 60th day after Keyport is notified of the death, surrender the
Certificate Owner Account for the death benefit on the date of surrender,
calculated as described above. For a surrender after the applicable 90 or 60
day period, the Surrender Value is payable instead.
If the Certificate is not surrendered, the Certificate can stay In Force for
the time period permitted by the Internal Revenue Code provisions applicable
to the particular Qualified Plan. During this period, the Designated
Beneficiary may exercise all ownership rights, including the right to make
partial surrenders or the right to totally surrender the Certificate pursuant
to the surrender provisions of the Certificate. If the Certificate is still
In Force at the end of the period, Keyport will automatically end it then by
paying to the Designated Beneficiary the Surrender Value. If the Designated
Beneficiary is not alive then, Keyport will pay any person(s) named by the
Designated Beneficiary in a Written Request, otherwise the Designated
Beneficiary's estate.
Payment of Benefits. Instead of receiving a lump sum, the Certificate Owner
or any Designated Beneficiary may, by Written Request, direct Keyport to pay
any benefit of $5,000 or more under an Annuity Option that meets the
following requirements: (a) the first payment to the Designated Beneficiary
must be made no later than one (1) year after the date of death; (b) payments
must be made over the life of the Designated Beneficiary or over a period not
extending beyond that person's life expectancy; and (c) any payment option
that provides for payments to continue after the death of the Designated
Beneficiary will not permit the successor payee to extend the period of time
over which the remaining payments are to be made. The Certificate Owner may
also direct that any benefit payable to a Designated Beneficiary be paid
under an Annuity Option meeting these same requirements.
D. ANNUITY PAYMENT PROVISIONS
1. Annuity Benefits
If the Annuitant is alive on the Income Date and the Certificate is In Force,
payments will begin under the payment option the Certificate Owner has
chosen. The amount of the payments will be determined by applying the Income
Value (less any premium taxes or other taxes not previously deducted) on the
Income Date in accordance with the option selected. The total Income Value
is the sum of the Accumulated Value for an Interest Sub-Account and the
Indexed Value of the Index Account(s).
2. The Income Date and Form of Annuity
The Income Date is shown on the Certificate Specifications page. If the
Annuitant dies before the Income Date and there is a successor Annuitant, the
Income Date will be based on the successor Annuitant's birthday if the
successor Annuitant is younger than the deceased Annuitant.
Under Allocated Certificates, a Certificate Owner may elect, at least thirty
(30) days prior to the Income Date, to have the Income Value applied on the
Income Date under any of the Annuity Options described below. In the absence
of such election, the Income Value will be applied on the Income Date under
Option 3 to provide a monthly life annuity with ten (10) years of payments
guaranteed.
If a Certificate is issued on a Non-Allocated basis, a Certificate Owner may
request that a portion of the Account Value, as modified by any applicable
Surrender Charge and Market Value Adjustment, be applied under an Annuity
Option for a participant in that Certificate Owner's plan. Keyport will then
issue a Certificate for such participant (who is also the Annuitant) and
begin annuity payments as directed by the Certificate Owner.
No surrenders may occur after the Income Date. Other special rules may apply
to qualified retirement plans. (See "Qualified Plans".)
3. Change of Annuity Option
The Certificate Owner may change the Annuity Option from time to time, but
the change must be made by Written Request and received by Keyport at least
thirty (30) days prior to the scheduled Income Date.
4. Annuity Options
In addition to the following options, other options may be arranged with the
mutual consent of the Certificate Owner and Keyport.
Option 1 - Income for a Fixed Number of Years. Keyport will pay an annuity
for a chosen number of years, not less than five (5) or more than thirty
(30). If, at the death of the payee, Option 1 payments have been made for
less than the chosen number of years:
(a) payments will be continued during the remainder of the period to the
successor payee; or
(b) the successor payee may elect to receive in a lump sum the present value
of the remaining payments, commuted at the rate of 3% per year or at any
greater interest rate used to create the annuity factor for this Option 1.
See "Annuity Payments" for the manner in which Option 1 may be taxed.
Option 2 - Life Income. Keyport will pay an annuity for as long as the payee
is alive. The amount of the annuity payments will depend on the age of the
payee at the time annuity payments are to begin and may also depend on the
payee's sex. IT IS POSSIBLE UNDER THIS OPTION TO RECEIVE ONLY ONE ANNUITY
PAYMENT IF THE PAYEE DIES AFTER THE RECEIPT OF THE FIRST PAYMENT OR TO
RECEIVE ONLY TWO ANNUITY PAYMENTS IF THE PAYEE DIES AFTER RECEIPT OF THE
SECOND PAYMENT AND SO ON.
Option 3 - Life Income with 5 or 10 Years Guaranteed. Keyport will pay an
annuity during the lifetime of the payee. If, at the death of the payee,
payments have been made for less than the selected number of years:
(a) payments will be continued during the remainder of the period
to the successor payee; or
(b) the successor payee may elect to receive in a lump sum the
present value of the remaining certain payments, commuted at the
rate of 3% per year or at any greater interest rate used to create
the annuity factor for this Option 3.
The amount of the annuity payments will depend on the age of the payee at the
time annuity payments are to begin and may also depend on the payee's sex.
Option 4 - Joint and Last Survivor Income. Keyport will pay an annuity for
as long as either the payee or a designated second natural person is alive.
The amount of the annuity payments will depend on the age of both persons at
the time annuity payments are to begin and may also depend on each person's
sex. IT IS POSSIBLE UNDER THIS OPTION TO RECEIVE ONLY ONE ANNUITY PAYMENT IF
BOTH PAYEES DIE AFTER THE RECEIPT OF THE FIRST PAYMENT OR TO RECEIVE ONLY TWO
ANNUITY PAYMENTS IF BOTH PAYEES DIE AFTER RECEIPT OF THE SECOND PAYMENT AND
SO ON.
5. Frequency and Amount of Payments
Payments will normally be made in monthly installments. However, if the net
amount available to apply under any Annuity Option is less than $5,000,
Keyport has the right to pay the amount in one lump sum, in lieu of the
payment otherwise provided. In addition, if the payments would be or become
less than $100, Keyport has the right to change the frequency of payments to
such intervals as will result in payments of at least $100 each.
6. Proof of Age, Sex, and Survival of Annuitant
Keyport may require proof of age, sex, or survival of any payee upon whose
age, sex, or survival payments depend. If the age or sex has been misstated,
Keyport will compute the amount payable based on the correct age and sex. If
income payments have begun, any underpayment Keyport may have made will be
paid in full with the next annuity payment. Any overpayment, unless repaid
in one sum, will be deducted from future annuity payments until Keyport is
repaid in full.
INVESTMENTS BY KEYPORT
Assets of Keyport must be invested in accordance with the requirements
established by applicable state laws regarding the nature and quality of
investments that may be made by the general accounts and separate accounts of
life insurance companies and the percentage of their assets that may be
committed to any particular type of investment. In general, these laws
permit investments, within specified limits and subject to certain
qualifications, in Federal, state, and municipal obligations, corporate
bonds, preferred and common stocks, real estate mortgages, real estate, and
certain other investments. (See F. INVESTMENTS, below for further
information on the investments of Keyport.)
All of Keyport's General Account assets will be available to fund a
Certificate Owner's claims under a Certificate.
In establishing the Guaranteed Interest Rates and Guaranteed Interest Rates
Factors under the Certificates, Keyport intends to take into account, among
other factors, the yields available on the instruments in which it will
invest the proceeds from the Certificates. (See "Interest Sub-Account", and
"Establishment of Guaranteed Interest Rate Factors".) Keyport's obligations
and the values and benefits under the Certificates, however, do not vary as a
direct function of the returns on the instruments in which Keyport will have
invested the proceeds from the Certificates.
Keyport's investment strategy with respect to the proceeds attributable to
Certificates generally will be to invest in debt securities which it will use
to match its liabilities with respect to the Terms of Index Sub-Accounts to
which the proceeds are allocated. This will be done, in Keyport's sole
discretion, by making investments which are authorized by applicable state
law. Keyport expects to invest a substantial portion of the premiums
received in securities issued by the United States Government, its agencies,
and instrumentalities, which may or may not be guaranteed by the United
States Government. This could include T-Bills, Notes, Bonds, Zero Coupon
Securities, and Mortgage Pass-Through Certificates, including Government
National Mortgage Association backed securities (GNMA Certificates), Federal
National Mortgage Association Guaranteed Pass-Through Certificates (FNMA
Certificates), Federal Home Loan Mortgage Corporation Mortgage Participation
Certificates (FHLMC Certificates), and others.
In addition, Keyport may invest its assets in various instruments, including
equity options, futures, forwards, and other instruments based on the S&P
Index in order to hedge Keyport's obligations with respect to Index Sub-
Accounts. Keyport may also buy and sell interest rate swaps and caps,
Treasury bond futures, and other instruments to hedge its exposure to changes
in interest rates. These derivative instruments will be purchased from
counterparties which conform to Keyport's Policies and Guidelines regarding
derivative instruments. Investments in these instruments generally involve
the following types of risks: in the case of over-the-counter options and
forward contracts, there is no guarantee that markets will exist for these
investments when Keyport wants to close out a position; futures exchanges may
impose trading limits which may inhibit Keyport's ability to close out
positions in exchange-listed instruments; and if Keyport has an open position
with a dealer that becomes insolvent, Keyport may experience a loss.
While the foregoing generally describes Keyport's investment strategy with
respect to the proceeds attributable to the Certificates, Keyport is not
obligated to invest assets, including the proceeds attributable to the
Certificates, according to any particular strategy, except as may be required
by Rhode Island and other state insurance laws.
AMENDMENT OF CERTIFICATE
Keyport reserves the right to amend the Certificate to meet the requirements
of any applicable Federal or state laws or regulations. Keyport will notify
Certificate Owners in writing of any such amendments.
ASSIGNMENT OF CERTIFICATE
A Certificate Owner may assign a Certificate at any time, as permitted by
applicable law. A copy of any assignment must be filed with Keyport. An
assignment will not be binding upon Keyport until it receives a written copy.
The Certificate Owner's rights and those of any revocably-named person will
be subject to the assignment.
Any Qualified Certificate may have limitations on assignability. Keyport
assumes no responsibility for the validity or effect of any assignment.
Because an assignment may be a taxable event, a Certificate Owner should
consult a competent tax adviser as to the tax consequences of any assignment.
DISTRIBUTION OF CERTIFICATE
Keyport Financial Services Corp. ("KFSC") serves as the Principal Underwriter
for the Certificate described in this Prospectus. The Certificate will be
sold by salespersons who represent Keyport Life Insurance Company (KFSC's
corporate parent) as insurance agents and who are registered representatives
of broker-dealers who have entered into distribution agreements with KFSC.
KFSC is a wholly-owned subsidiary of Keyport and is registered with the
Securities and Exchange Commission ("SEC") under the Securities Exchange Act
of 1934 ("Exchange Act") as a broker-dealer. KFSC is a member of the
National Association of Securities Dealers, Inc. ("NASD"). It is located at
125 High Street, Boston, Massachusetts 02110.
Keyport will pay a maximum commission to broker-dealers of 5.25% of any
premium paid under a Certificate and may pay a reduced commission.
Certificates may be sold with a lower commission structure (1) to a person
who is an officer, director or employee of Keyport or of certain affiliates
of Keyport or (2) to any Qualified Plan established for such a person. Such
Certificates will have higher Participation Rates under the Index Sub-
Account(s), reflecting anticipated cost savings to Keyport from the lower
commission structure..
TAX CONSIDERATIONS
A. GENERAL
SINCE THE LAW IS COMPLICATED AND SINCE TAX CONSEQUENCES WILL VARY ACCORDING
TO THE ACTUAL STATUS OF THE CERTIFICATE OWNER, LEGAL AND TAX ADVICE MAY BE
NEEDED BY A PERSON, EMPLOYER, OR OTHER ENTITY CONTEMPLATING THE PURCHASE OF A
CERTIFICATE DESCRIBED IN THIS PROSPECTUS.
It should be understood that any detailed description of the tax consequences
regarding the purchase of a Certificate cannot be made in this Prospectus and
that special tax rules may be applicable with respect to certain purchase
situations not discussed herein. In addition, no attempt is made to consider
any applicable state or other tax laws. For detailed information, a
competent tax advisor should always be consulted.
This discussion is based upon Keyport's understanding of Federal income tax
laws as they are currently interpreted. The United States Congress has in
the past and may in the future consider legislation that, if enacted, could
adversely affect the tax treatment of annuity Certificates, including
distributions and undistributed appreciation. There is no way of predicting
whether, when, or in what form Congress will enact legislation affecting
annuity contracts. Any such legislation could have retroactive effect
regardless of the date of enactment. No representation is made regarding the
likelihood of continuation of those current Federal income tax laws or of the
current interpretations by the Internal Revenue Service.
B. TAXATION OF KEYPORT
Keyport is taxed as a life insurance company under Part I of Subchapter L of
the Internal Revenue Code ("Code"). The assets underlying the Certificates
will be owned by Keyport. Any income earned on those assets will be
Keyport's income.
C. TAXATION OF ANNUITIES IN GENERAL
1. General
Section 72 of the Code governs the taxation of annuities in general. A
Certificate Owner (including a trust or other entity owning a Non-Qualified
Certificate as an agent for an individual) is not taxed on increases in
Certificate Owner Account Value until a distribution occurs, either in the
form of a lump sum payment (e.g., a full or partial surrender of the
Certificate Owner Account Value), an assignment, a gift of the Certificate,
or as annuity payments. The provisions of Section 72 of the Code concerning
distributions are briefly summarized below. A trust or other entity owning a
Non-Qualified Certificate other than as an agent for an individual is taxed
differently; increases in Sub-Account Value are taxed yearly whether or not a
distribution occurs.
2. Surrender, Assignments, and Gifts
A Certificate Owner who fully surrenders the Certificate is taxed on the
portion of the payment that exceeds the Certificate Owner's cost basis in the
Certificate. For Non-Qualified Certificates, the cost basis is generally the
amount of the Initial Premium and any Subsequent Premium(s), and the taxable
portion of the surrender payment is taxed as ordinary income. For Qualified
Certificates, the cost basis is generally zero, and the taxable portion of
the surrender payment is generally taxed as ordinary income subject to
special 5-year income averaging for lump-sum distributions received before
January 1, 2000. A Designated Beneficiary receiving a lump sum surrender
benefit after the death of the Annuitant or Certificate Owner is taxed on the
portion of the amount that exceeds the Certificate Owner's cost basis in the
Certificate. If the Designated Beneficiary elects to receive annuity
payments within sixty (60) days of the decedent's death, different tax rules
apply. See "Annuity Payments" below.
Partial surrenders received under Non-Qualified Certificates prior to the
Income Date are first included in gross income to the extent that Certificate
Owner Account Value exceeds the Initial Premium and any Subsequent Premium.
Then, to the extent Certificate Owner Account Value does not exceed the
Initial Premium and any Subsequent Premium, such surrenders are treated as a
non-taxable return of principal to the Certificate Owner. For partial
surrenders under a Qualified Certificate, payments are treated first as a non-
taxable return of principal up to the cost basis and then a taxable return of
income. Since the cost basis of Qualified Certificates is generally zero,
partial surrender amounts will generally be fully taxed as ordinary income.
A Certificate Owner who assigns or pledges a Non-Qualified Certificate is
treated as having received the amount assigned or pledged and thus is subject
to taxation under the rules applicable to surrenders. A Certificate Owner
who gives away the Certificate (i.e., transfers it without full and adequate
consideration) to anyone other than his or her spouse is treated for income
tax purposes as if he or she had fully surrendered the Certificate.
A special computational rule applies if Keyport issues to the Certificate
Owner, during any calendar year, (a) two or more Certificates or (b) one or
more Certificates and one or more of Keyport's other annuity contracts.
Under this rule, the amount of any distribution includable in the Certificate
Owner's gross income is to be determined under Section 72(e) of the Code by
treating all the Keyport contracts and Certificates as one. Keyport believes
that this means the amount of any distribution under one Certificate will be
includable in gross income to the extent that, at the time of distribution,
the sum of the values for all the Certificates or Certificates exceeds the
sum of the cost bases for all the Certificates.
3. Annuity Payments
The non-taxable portion of each annuity payment is determined by an
"exclusion ratio" formula which establishes the ratio that the cost basis of
the Certificate bears to the total expected value of annuity payments for the
term of the annuity. The remaining portion of each payment is taxable. Such
taxable portion is taxed at ordinary income rates.
For Qualified Certificates, the cost basis is generally zero. With annuity
payments based on life contingencies, the payments will become fully taxable
once the payee lives longer than the life expectancy used to calculate the
non-taxable portion of the prior payments.
4. Penalty Tax
Payments received by Certificate Owners, Annuitants, and Designated
Beneficiaries under Certificates may be subject to both ordinary income taxes
and a penalty tax equal to ten percent (10%) of the amount received that is
includable in income. The penalty tax is not imposed on amounts received:
(a) after the taxpayer attains age 59-1/2; (b) in a series of substantially
equal payments made for life or life expectancy; (c) after the death of the
Certificate Owner (or, where the Certificate Owner is not a human being,
after the death of the Annuitant); (d) if the taxpayer becomes totally and
permanently disabled; or (e) under a Non-Qualified Certificate's annuity
payment option that provides for a series of substantially equal payments,
provided the Certificate is not issued as a result of a Section 1035 exchange
and the first annuity payment begins in the first Certificate Year.
5. Income Tax Withholding
Keyport is required to withhold Federal income taxes on taxable amounts paid
under Certificates unless the recipient elects not to have withholding apply.
Keyport will notify recipients of their right to elect not to have
withholding apply. See "Tax-Sheltered Annuities" ("TSAs") for an alternative
type of withholding that may apply to distributions from TSAs that are
eligible for rollover to another TSA or to an individual retirement annuity
or account ("IRA").
6. Section 1035 Exchanges
A Non-Qualified Certificate may be purchased with proceeds from the surrender
of an existing annuity Certificate. Such a transaction may qualify as a tax-
free exchange pursuant to Section 1035 of the Code. It is Keyport's
understanding that in such an event: (a) the new Certificate will be subject
to the distribution-at-death rules described in "Death Provisions for Non-
Qualified Certificates"; (b) premium payments made between August 14, 1982
and January 18, 1985, and the income allocable to them will, following an
exchange, no longer be covered by a "grandfathered" exception to the penalty
tax for a distribution of income that is allocable to an investment made over
ten (10) years prior to the distribution; and (c) premium payments made
before August 14, 1982, and the income allocable to them will, following an
exchange, continue to receive the following "grandfathered" tax treatment
under prior law: (i) the penalty tax does not apply to any distribution; (ii)
partial surrenders are treated first as a non-taxable return of principal and
then a taxable return of income; and (iii) assignments are not treated as
surrenders subject to taxation.
Keyport's understanding of the above is principally based on legislative
reports prepared by the Staff of the Congressional Joint Committee on
Taxation.
D. QUALIFIED PLANS
The Certificate is designed for use with several types of Qualified Plans.
The tax rules applicable to participants in such Qualified Plans vary
according to the type of Plan and the terms and conditions of the Plan
itself. Therefore, no attempt is made herein to provide more than general
information about the use of the Certificate with the various types of
Qualified Plans.
Participants under such Qualified Plans as well as Certificate Owners,
Annuitants, and Designated Beneficiaries are cautioned that the rights of any
person to any benefits under such Qualified Plans may be subject to the terms
and conditions of the Plans themselves regardless of the terms and conditions
of the Certificate issued in connection therewith. Following are brief
descriptions of the various types of Qualified Plans and of the use of the
Certificate in connection therewith. Purchasers of the Certificate should
seek competent advice concerning the terms and conditions of the particular
Qualified Plan and use of the Certificate with that Plan.
1. Tax-Sheltered Annuities
Section 403(b) of the Code permits public school employees and employees of
certain types of charitable, educational, and scientific organizations
specified in Section 501c(3) of the Code to purchase annuity Certificates
and, subject to certain contribution limitations, exclude the amount of
premium payments from gross income for tax purposes. However, such premium
payments may be subject to Social Security ("FICA") taxes. This type of
annuity Certificate is commonly referred to as a "Tax-Sheltered Annuity".
Section 403(b)(11) of the Code contains distribution restrictions.
Specifically, benefits may be paid, through surrender of the Certificate or
otherwise, only (a) when the employee attains age 59-1/2, separates from
service, dies, or becomes totally and permanently disabled (within the
meaning of Section 72(m)(7) of the Code) or (b) in the case of hardship. A
hardship distribution must be of employee contributions only and not of any
income attributable to those contributions. Section 403(b)(11) does not
apply to distributions attributable to assets held as of December 31, 1988.
Thus, it appears that the law's restrictions would apply only to
distributions attributable to contributions made after 1988, to earnings on
those contributions, and to earnings on amounts held as of December 31, 1988.
The Internal Revenue Service has indicated that the distribution restrictions
of Section 403(b)(11) are not applicable when TSA funds are being transferred
tax-free directly to another TSA issuer, provided the transferred funds
continue to be subject to the Section 403(b)(11) distribution restrictions.
Keyport will notify a Certificate Owner who has requested a distribution from
a Certificate if all or part of the distribution is eligible for rollover to
another TSA or to an IRA. Any amount eligible for rollover treatment will be
subject to mandatory Federal income tax withholding at a twenty percent (20%)
rate if the Certificate Owner receives the amount rather than directing
Keyport by Written Request to transfer the amount as a direct rollover to
another TSA or IRA.
2. Individual Retirement Annuities
Section 408 of the Code permits eligible individuals to contribute to an
individual retirement program known as an "Individual Retirement Annuity."
These Individual Retirement Annuities are subject to limitations on the
amount which may be contributed, the persons who may be eligible, and on the
time when distributions may commence. In addition, distributions from
certain types of Qualified Plans may be placed on a tax-deferred basis into
an Individual Retirement Annuity.
3. Corporate Pension and Profit-Sharing Plans
Sections 401(a) and 403(a) of the Code permit corporate employers to
establish various types of retirement plans for employees. Such retirement
plans may permit the purchase of the Certificate to provide benefits under
the plans.
THE COMPANY
A. Business
1. General
Keyport was incorporated in Rhode Island in 1957 as a stock life insurance
company. Its executive and administrative offices are located at 125 High
Street, Boston, Massachusetts 02110. Its home office is at 235 Promenade
Street, Providence, Rhode Island 02903 and will be relocated in May, 1997 to
695 George Washington Highway, Lincoln, Rhode Island 02865.
Keyport's wholly-owned subsidiaries are Independence Life and Annuity Company
("Independence Life"), an insurance company; Keyport Advisory Services Corp.,
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.
Keyport is a specialty insurance company providing a diversified line of
fixed, equity-indexed and variable annuity products on a non-participating
basis and on an individual and group basis. These annuity products are sold
through a wide ranging network of banks, agents and securities dealers.
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. Standard & Poor's ("S&P") has rated Keyport AA- for excellent
financial security, Moody's Investor Services ("Moody's") has rated Keyport
A1 for good financial strength and Duff & Phelps has rated Keyport AA- for
very high claims paying ability. The A.M. Best's A+ rating is in the highest
rating category, which also includes A++. S&P and Duff & Phelps have one
rating category above AA and Moody's has two rating categories above A. The
Moody's "1" modifier signifies that Keyport is at the higher end of the A
category while the S&P and Duff & Phelps "-" modifier signifies that Keyport
is at the lower end of the AA category. These ratings merely reflect the
opinion of the rating company as to the relative financial strength of
Keyport and Keyport's ability to meet its contractual obligations to its
policyholders.
2. 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.
B. Selected Financial Data
The following selected consolidated financial data for Keyport should be read
in conjunction with the consolidated financial statements and notes thereto
included elsewhere in this prospectus.
Selected Financial Data (in thousands)
As of and for the year
ended December 31
1996 1995 1994 1993 1992
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 $12,305,312 $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
C. Management's Discussion and Analysis of Results of Operations and
Financial Condition
1. 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.
2. 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.
3. 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.
4. 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.
5. 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.
D. 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.
E. 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.
F. Employees
As of December 31, 1996, Keyport had 358 full-time employees.
G. Regulation
Keyport's business activities are extensively regulated. The following
briefly summarizes the principal regulatory requirements and certain related
matters.
Keyport'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 is chartered in Rhode Island, and the Rhode Island Department of
Business Regulation is its primary oversight regulator. Keyport also must be
licensed by the state insurance regulators in each other jurisdiction in
which it conducts business. It currently is licensed to conduct business in
49 states (the exception being New York), and in the District of Columbia and
the Virgin Islands. 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.
KFSC, a subsidiary of Keyport, is regulated as a broker-dealer under the
Exchange Act and is a member of the NASD. (See "Distribution of
Certificate".)
COMPANY MANAGEMENT
The following are the principal officers and directors of the Company:
Other Business,
Position with Vocation or
Keyport Employment for
Name, Age Year of Election Past Five Years
Kenneth R. Leibler, Chairman of the Board, Chief Executive
48 12/31/94, Officer 1/1/95;
formerly 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, Chairman of The
and Assistant Providence Plan,
Secretary 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 Vice President,
President and Chief Sales Officer
Chief Sales of KFSC,5/20/94;
Officer, 5/16/94 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 President
50 and General Counsel, and General Counsel of
9/1/95 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 Executive Vice President, Formerly Senior Vice
4/10/97, and Chief President of the
Financial Officer, 9/1/95 Company, 9/1/95;
Director and Senior
Vice President and
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, Formerly Chief
4/5/90 and Chief Administrative
Information Officer, 4/10/97 Officer of the
Company, 4/5/90;
Director, 3/15/95 Vice
President,
Administration,
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 Chief Vice President and
Actuary, 11/9/90 Chief Actuary of
Independence Life and
Annuity Company,
10/1/93
James P. Greaton, 39 Vice President and Formerly Valuation
Corporate Actuary, 5/6/96 Actuary, Providian
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 Senior Vice President, Vice President,
4/10/97, and Chief Investments, of
Investment 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
EXECUTIVE COMPENSATION TABLES AND INFORMATION
The tables that appear below, along with the accompanying text and footnotes,
provide information on compensation and benefits for the named executive
officers, in accordance with applicable Securities and Exchange Commission
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 $50,000 or 10% of such officer's total salary and bonus for such
year.
Summary Compensation Table. The following table sets forth compensation
information for 1996 for each of Keyport's chief executive officer and the
other four most highly compensated executive officers:
Summary Compensation Table
1996 Compensation
Name and Principal Securities All Other
Position Base Salary Bonus Underlying Compensation
during 1996 ($) ($)1 Options (#) ($)2
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, 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
____________________________________________
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, $29,747 of moving expenses reimbursement.
Option Grant Table. The following table sets forth certain information
regarding options to purchase Common Stock granted during 1996 by Liberty
Financial to the executive officers named in the above Summary Compensation
Table.
Option Grants in Last Fiscal Year
Name Number Percent Exercise
of of Total Price Expira- Potential
Securities Options Per tion Realizable
Underlying Granted to Share on Value at
Options Employees ($) Date1 Assumed
Granted (#) in 1996 Annual Rates of
Stock Price
Appreciation for
Option Term ($)2
5% 10%
John W.
Rosensteel 15,000 2.45% 33.00 5/06/06 311,303 788,903
Paul
LeFevre, Jr. 9,000 1.47% 33.00 5/06/06 186,782 473,342
John E.
Arant III 5,000 0.82% 33.00 5/06/06 103,768 262,968
Francis E.
Reinhart 7,500 1.23% 33.00 5/06/06 155,651 394,451
Bernard R.
Beckerlegge 7,000 1.14% 33.00 5/06/06 145,275 368,155
_____________________
1 Each option becomes exercisable in four equal annual installments
commencing on May 7, 1997, and vests in full upon the death, disability or
retirement of the optionee.
2 Amounts represent hypothetical gains that could be achieved for the
respective options if such options are not exercised until the end of the
option term. These gains are based on assumed rates of stock price
appreciation of 5% and 10% in accordance with applicable SEC regulations,
compounded annually from the dates the options were granted until their
expiration dates and, therefore, are not intended to forecast possible future
appreciation in the Common Stock. This table does not take into account any
appreciation in the price of the Common Stock after the date of grant.
Option Exercises and Year-End Values Table. The following table sets forth
certain information regarding (i) the 1996 exercises of stock options and
(ii) the stock options held as of December 31, 1996 by the executive officers
named in the above Summary Compensation Table.
Aggregate Option Exercises in Last Financial Year and Option Values at Fiscal
Year-End
Number
Shares Value of Value of
Acquired Real- Securities Unexercised
Upon ized Underlying In-the-Money
Exercise Unexercised Options
Name (#) ($) Options at Year-End ($)
Year-End (#)
Exerc- Unexerc- Exerc- Unexerc-
isable isable isable isable
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
Certain Additional Information Regarding Executive Officer Compensation
Defined Benefit Retirement Programs. Each of the executive officers in the
above Summary Compensation Table participates in Keyport's Pension Plan and
Supplemental Pension Plan (collectively, the "Pension Plans"). The following
table shows the estimated annual pension benefits payable upon retirement for
the specified compensation and years of service classification under Liberty
Financial's Pension Plans.
Estimated Annual Retirement Benefits at Age 65 under Pension Plans
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.
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.
EXPERTS
The consolidated financial statements of Keyport Life Insurance Company at
December 31, 1996, and for the year then ended, appearing in this Prospectus
and Registration Statement have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report given upon
the authority of such firm as experts in accounting and auditing.
The consolidated financial statements of Keyport Life Insurance Company and
subsidiaries as of December 31, 1995 and for each of the years in the two-
year period ended December 31, 1995 have been included herein in reliance on
the report of KPMG Peat Marwick LLP, independent certified public
accountants, and upon the authority of said firm as experts in accounting and
auditing. The report of KPMG Peat Marwick LLP covering the December 31, 1995
financial statements refers to a change in accounting to adopt Statement of
Financial Accounting Standards No. 115, Accounting for Certain Investments in
Debt and Equity Securities.
CHANGE IN ACCOUNTANTS
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, 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, 1996 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 ended December 31, 1995, and the subsequent interim period
through March 14, 1996, there were no disagreements between Keyport and KPMG
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedures, which disagreements if not
resolved to KPMG's satisfaction would have caused KPMG to make reference to
the subject matter of the disagreement in connection with KPMG's audit
reports on the financial statements of Keyport. In addition, the audit
reports of KPMG on the financial statements of Keyport as of and for the two
fiscal years ended December 31, 1995 did not contain any adverse opinion or
disclaimer of opinion, nor were such reports qualified or modified as to
uncertainty or audit scope. The report of KPMG Peat Marwick LLP covering the
December 31, 1995 financial statements refers to a change in accounting to
adopt statement of Financial Accounting Standards No. 115, Accounting for
Certain Investments in Debt and Equity Securities, effective January 1, 1994.
LEGAL MATTERS
Legal matters with respect to the organization of Keyport, its authority to
issue annuity contracts and the validity of the Certificates, as well as
matters relating to the Federal securities laws, have been passed upon by
Bernard R. Beckerlegge, General Counsel. In addition, certain matters
relating to the Federal securities laws have been passed upon by Katten
Muchin & Zavis as Special Counsel for Keyport.
<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 16. 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 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 for the two-year period then ended, as listed in
the accompanying index. These consolidated financial statements and financial
statement schedules are the responsibility 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 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)
December 31
ASSETS 1996 1995
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
See accompanying notes
<PAGE>
KEYPORT LIFE INSURANCE COMPANY
CONSOLIDATED INCOME STATEMENT
(in thousands)
Year Ended December 31
1996 1995 1994
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
See accompanying notes
<PAGE>
KEYPORT LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
(in thousands)
Net
Unrealized
Additional Investment
Common Paid-in Gains Retained
Stock Capital (Losses) Earnings Total
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
See accompanying notes
<PAGE>
KEYPORT LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
Year Ended December 31
1996 1995 1994
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 investment
(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
investments (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) (972,677) (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
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):
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
December 31, 1996
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
[CAPTION] Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
December 31, 1995
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
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):
Amortized Fair
Cost Value
December 31, 1996
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
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):
Year Ended December 31
1996 1995 1994
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
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):
1996 1995 1994
Year Ended December 31
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)
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):
Assets (Liabilities)
Carrying Fair Carrying Fair
Notional Amounts Value Value Value Value
December 31 1996 1995 1996 1996 1995 1995
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)
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.
1996 1995
December 31
(Dollars in thousands)
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
The assumptions used to develop the actuarial present value of the
projected benefit obligation and the expected long-term rate of return on
plan assets are as follows:
Year Ended December 31 1996 1995 1994
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%
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):
December 31 1996 1995
Carrying Fair Carrying Fair
Value Value Value Value
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
8. Quarterly Financial Data, in thousands (unaudited)
Quarter Ended 1996 March 31 June 30 September 30 December 31
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
Quarter Ended 1995 March 31 June 30 September 30 December 31
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
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):
Year Ended December 31 1996 1995 1994
Statutory surplus $ 567,735 $ 535,179 $ 546,440
Statutory net income 40,237 38,264 23,385
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.
<PAGE>
APPENDIX A
FORMULA FOR INDEX INCREASES AND/OR DECREASES, AND ILLUSTRATION OF INDEX
INCREASES AND INDEX DECREASES
The Certificate provides that the Index Increase or Index Decrease is to be
calculated on each Sub-Account Anniversary. On the first Sub-Account
Anniversary in a Term, the formula for the Index Increase or Decrease, if
any, is:
A x ((C-D)/D x (E/F) x G
This calculation provides the proportionate credit for any change in the S&P
Index from its value at the beginning of the Term to its value on the first
Sub-Account Anniversary.
For every Sub-Account Anniversary after the first in a Term, the calculation
of the Index Increases or Index Decreases, if any, is the sum of two parts:
Part 1 represents the proportionate credit for an increase (if any) in the
S&P Index from its prior highest Sub-Account Anniversary value to its value
on the current Sub-Account Anniversary. The formula for Part 1 is:
A x ((C-B)/D) x (E/F) x G
Part 2 represents the proportionate credit for an increase(s) or decrease(s)
(if any) in the S&P Index occurring on a prior Sub-Account Anniversary(ies).
The formula for Part 2 is:
A x ((B-D)/D) x (1/F) x G
where:
A is the Participation Rate for the Term
B is the highest S&P Index Value on all Sub-Account Anniversaries,
excluding the S&P Index value at the beginning of the Term and on the
current Sub-Account Anniversary. The value of B can never be less than
the Minimum S&P Index Value nor greater than the Maximum S&P Index
value. The Minimum S&P Index Value and the Maximum S&P Index Value are
defined below.
C is the value of the S&P Index on the current Sub-Account Anniversary,
not less than B or greater than the Maximum S&P Index Value for the
Term.
D is the S&P Index value at the beginning of the Term
E is the number of completed Sub-Account Years in the Term
F is the total number of Sub-Account Years in the Term
G is the smaller of the Indexed Value at the beginning of the term and the
Indexed Value (prior to the crediting of any Index Increases and/or
Decreases) on any Sub-Account Anniversary in the Term, including the
current Sub-Account Anniversary
The Minimum S&P Index Value and the Maximum S&P Index Value are defined as
follows:
Minimum S&P Index Value = [(Floor / Participation Rate for Term) + 1] x
Beginning of Term S&P Index Value]
Maximum S&P Index value = [(Cap / Participation Rate for Term) + 1] x
Beginning of Term S&P Index Value]
Using the assumptions below, we have prepared the following six illustrations
using different assumptions as to changes in the S&P Index value during the
course of the Term. THESE ASSUMPTIONS AND ILLUSTRATIONS ARE NOT AND ARE NOT
INTENDED AS PREDICTIONS OF CHANGES IN THE S&P INDEX DURING THE COURSE OF ANY
TERM. THE S&P INDEX MAY RISE OR FALL DURING THE COURSE OF A TERM, AND AT THE
END OF A TERM THE S&P INDEX VALUE MAY BE HIGHER OF LOWER THAN AT THE
BEGINNING OF THE TERM. KEYPORT MAKES NO PREDICTIONS, REPRESENTATIONS, OR
GUARANTEES AS TO FUTURE CHANGES IN THE S&P INDEX. THESE VALUES ARE BASED ON
THE ASSUMPTION THAT NO PARTIAL SURRENDERS ARE MADE.
Illustration No. 1
Assumptions:
Term Length (Years) = 5
Beginning Indexed Value = $100,000
Beginning S&P Index Value = 500
Participation Rate = 80%
Cap = 80%
Maximum S&P Index Value = [(80%/80%) + 1] x 500 = 1,000
Floor = 0%
Minimum S&P Index Value = [(0%/80%) + 1] x 500 = 500
End Value Change Value Value Value Value
of of in of of of of Indexed
Year INDEX INDEX B* C Part I Part 2 Value
0 500 $100,000.00
1 600 20% 500 600 $ 3,200 N/A $103,200.00
2 690 38% 600 690 $ 5,760 $ 3,200 $112,160.00
3 775 55% 690 775 $ 8,160 $ 6,080 $126,400.00
4 900 80% 775 900 $16,000 $ 8,800 $151,200.00
5 1035 107% 900 1,000 $16,000 $12,880 $180,000.00
* Although B has a value on the first anniversary, it is part of the
formula for the calculation of Index Increases on the first Anniversary,
but is used as a comparison value in the calculation of C.
Illustration No. 2
Assumptions:
Term Length (Years) = 5
Beginning Indexed Value = $100,000
Beginning S&P Index Value = 500
Participation Rate = 80%
Cap = 80%
Maximum S&P Index Value = 1,000
Floor = -5%
Minimum S&P Index Value = 468.75
End Value Change Value Value Value Value
of of in of of of of Indexed
Year INDEX INDEX B* C Part I Part 2 Value
0 500 $100,000.00
1 450 -10% 468.75 468.75 -1,000.00 N/A $ 99,000.00
2 425 -15% 468.75 468.75 0.00 -990.00 $ 98,010.00
3 450 -10% 468.75 468.75 0.00 -980.10 $ 97,029.90
4 430 -14% 468.75 475.00 0.00 -970.30 $ 96,059.60
5 400 -20% 468.75 475.00 0.00 -960.60 $ 95,099.00
* Although B has a value on the first anniversary, it is part of the
formula for the calculation of Index Increases on the first Anniversary,
but is used as a comparison value in the calculation of C.
Illustration No. 3
Assumptions:
Term Length (Years) = 5
Beginning Indexed Value = $100,000
Beginning S&P Index Value = 500
Participation Rate = 80%
Cap = 80%
Maximum S&P Index Value = 1,000
Floor = -10%
Minimum S&P Index Value = 437.50
End Value Change Value Value Value Value
of of in of of of of Indexed
Year INDEX INDEX B* C Part I Part 2 Value
0 500 $100,000.00
1 450 -10% 437.50 450.00 -1,600.00 N/A $ 98,400.00
2 485 -3% 450.00 485.00 2,204.16 -1,574.40 $ 99,029.76
3 500 0% 485.00 500.00 1,416.96 -472.32 $ 99,974.40
4 520 4% 500.00 520.00 2,519.04 0.00 $102,493.44
5 550 10% 520.00 550.00 4,723.20 629.76 $107,846.40
* Although B has a value on the first anniversary, it is part of the
formula for the calculation of Index Increases on the first Anniversary,
but is used as a comparison value in the calculation of C.
Illustration No. 4
Assumptions:
Term Length (Years) = 5
Beginning Indexed Value = $100,000
Beginning S&P Index Value = 500
Participation Rate = 80%
Cap = 80%
Maximum S&P Index Value = 1,000
Floor = none
Minimum S&P Index Value = unlimited
End Value Change Value Value Value Value
of of in of of of of Indexed
Year INDEX INDEX B* C Part I Part 2 Value
0 500 $100,000.00
1 450 -10% <1,000 450 -1,600.00 N/A $ 98,400.00
2 425 -15% 450 450 0.00 -1,574.40 $ 96,825.60
3 450 -10% 450 450 0.00 -1,549.21 $ 95,276.39
4 475 -5% 450 475 3,048.84 -1,524.42 $ 96,800.81
5 400 -20% 475 475 0.00 -762.21 $ 96,038.60
* Although B has a value on the first anniversary, it is part of the
formula for the calculation of Index Increases on the first Anniversary,
but is used as a comparison value in the calculation of C.
Illustration No. 5
Assumptions:
Term Length (Years) = 5
Beginning Indexed Value = $100,000
Beginning S&P Index Value = 500
Participation Rate = 80%
Cap = 80%
Maximum S&P Index Value = 1,000
Floor = -5%
Minimum S&P Index Value = 468.75
End Value Change Value Value Value Value
of of in of of of of Indexed
Year INDEX INDEX B* C Part I Part 2 Value
0 500 $100,000.00
1 450 -10% 468.75 468.75 -1,600.00 N/A $ 99,000.00
2 425 -15% 468.75 468.75 0.00 -990.00 $ 98,010.00
3 450 -10% 468.75 468.75 0.00 -980.10 $ 97,029.90
4 475 -5% 475.00 475.00 776.24 -970.30 $ 96,835.84
5 400 -20% 475.00 475.00 0.00 -774.69 $ 96,061.15
* Although B has a value on the first anniversary, it is part of the
formula for the calculation of Index Increases on the first Anniversary,
but is used as a comparison value in the calculation of C.
Illustration No. 6
Assumptions:
Term Length (Years) = 5
Beginning Indexed Value = $100,000
Beginning S&P Index Value = 500
Participation Rate = 80%
Cap = 80%
Maximum S&P Index Value = 1,000
Floor = none
Minimum S&P Index Value = unlimited
End Value Change Value Value Value Value
of of in of of of of Indexed
Year INDEX INDEX B* C Part I Part 2 Value
0 500 $100,000.00
1 650 30% <1,000 650 4,800 N/A $104,800.00
2 485 -3% 650 650 0 4,800 $109,600.00
3 475 -5% 650 650 0 4,800 $114,400.00
4 450 -10% 650 650 0 4,800 $119,200.00
5 430 -14% 650 650 0 4,800 $124,000.00
* Although B has a value on the first anniversary, it is part of the
formula for the calculation of Index Increases on the first Anniversary,
but is used as a comparison value in the calculation of C.
<PAGE>
APPENDIX B
CALCULATION OF THE DEATH BENEFIT
In calculating the Death Benefit of an Index Sub-Account, the Certificate
provides for the recalculation of the applicable Index Increase or Decrease.
Set forth below is the formula for calculating the Death Benefit of an Index
Sub-Account and the factors specified in the Certificate for recalculating
the applicable Index Increase or Index Decrease.
If the Floor is greater than 0%, the Death Benefit is the greater of the
Indexed Value as of the date of death less any subsequent partial surrenders,
and the Surrender Value.
In all other situations, the Death Benefit is the greater of (a) minus (b)
and the Surrender Value where:
(a)is the Indexed Value at the start of the Sub-Account year in which
death occurs, with the applicable Index Increase or Index Decrease (see
"Appendix A") recalculated as follows: "E" is equal to "F" and "(B-D)" is
multiplied by the sum of 1.0 plus the number of Sub-Account years from the
start of such year to the end of the Term; and
(b)is the sum of any partial surrenders since the start of such year.
In either case, if death occurs in the last year of a Term and the surrender
occurs after the end of the Term, the death benefit is equal to the greater
of the Indexed Value at the end of such Term, less any subsequent partial
surrenders, and the Surrender Value.
<PAGE>
APPENDIX C
SCHEDULE OF STATE PREMIUM TAXES
Non-Tax Qualified Tax-Qualified
Contracts/Certificates Contracts/Certificates
State Rate of Tax Rate of Tax
Alabama 1.00% 1.00%
California 2.35 0.50
District of Columbia 2.00 2.00
Kansas 2.00 0.00
Kentucky 2.00 2.00
Maine 2.00 0.00
Mississippi 2.00 0.00
Nevada 3.50 0.00
North Carolina 1.75 0.00
South Dakota 1.25 0.00
Virgin Islands 5.00 5.00
West Virginia 1.00 1.00
Wyoming 1.00 0.00
<PAGE>
APPENDIX D
TELEPHONE INSTRUCTIONS
Telephone Transfers of Values of Certificate Owner Account
1. If there are joint Certificate Owners, both must authorize Keyport to
accept telephone instructions, but either Certificate Owner may give
Keyport telephone instructions.
2. All callers will be required to identify themselves. Keyport reserves
the right to refuse to act upon any telephone instructions in cases
where the caller has not sufficiently identified himself/herself to
Keyport's satisfaction.
3. Neither Keyport nor any person acting on its behalf shall be subject to
any claim, loss, liability, cost or expense if it or such person acted
in good faith upon a telephone instruction, including one that is
unauthorized or fraudulent; however, Keyport will employ reasonable
procedures to confirm that a telephone instruction is genuine and, if
Keyport does not, Keyport may be liable for losses due to an
unauthorized or fraudulent instruction. The Certificate Owner thus
bears the risk that an unauthorized or fraudulent instruction that is
executed may cause the values of a Certificate Owner Account to be lower
than it would be had no instruction been executed.
4. All conversations will be recorded with disclosure at the time of the
call.
5. The application for the Certificate may allow a Certificate Owner to
create a power of attorney by authorizing another person to give
telephone instructions. Unless prohibited by state law, such power will
be treated as durable in nature and shall not be affected by the
subsequent incapacity, disability, or incompetency of the Certificate
Owner. Either Keyport or the authorized person may cease to honor the
power by sending written notice to the Certificate Owner at the
Certificate Owner's last known address. Neither Keyport nor any person
acting on its behalf shall be subject to liability for any act executed
in good faith reliance upon a power of attorney.
6. Telephone authorization shall continue in force until (a) Keyport
receives the Certificate Owner's written revocation, or (b) Keyport
discontinues the privilege.
7. Telephone transfer instructions received by Keyport at 800-367-3653
before the close of trading on the New York Stock Exchange
("NYSE")(currently 4:00 p.m. Eastern Time) will be initiated that day
based on the unit value prices calculated at the close of that day.
Instructions received after the close of trading on the NYSE will be
initiated the following business day.
8. Once instructions are accepted by Keyport, they may not be canceled.
9. All transfers must be made in accordance with the terms of the
Certificate and current prospectus. If the transfer instructions are
not in good order, Keyport will not execute the transfer and will notify
the caller within 48 hours.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
Not Applicable
Item 14. Indemnification of Directors and Officers
The following provisions regarding the Indemnification of
Directors and Officers of the Registrant ("Keyport") are
applicable:
By-Laws, Article IX
Section 6 - Indemnification of Directors and Officers
Any person who at any time serves or shall serve as a Director
or Officer of the Corporation whether or not in office at the time
shall be indemnified or reimbursed against and for any and all
claims and liabilities to which he may be or become subject by
reason of such service and against and for any and all expenses
necessarily incurred or amounts paid in connection with the defense
or reasonable settlement or any legal or administrative proceedings
to which he is made a party by reason of such service, except in
relation to matters to which he shall be finally adjudged to be
liable of negligence or misconduct in the performance of his
official duties. Such a right of indemnification and reimbursement
shall also extend to the personal representatives of any such
person. Such rights shall not be deemed exclusive of any other
rights to which any such Director, officer or his personal
representatives may be entitled, under any other by-law or any
agreement or vote of the stockholders or Directors or otherwise.
Consistent with such By-Laws, Keyport has obtained insurance
from Liberty Mutual Insurance Company for its directors and
officers that supplements the indemnification provisions of the By-
Laws.
Item 15. Recent Sales of Unregistered Securities
Not applicable
Item 16. Exhibits and Financial Statement Schedules
Exhibits
1 Underwriter's Agreement*
3(a) Articles of Incorporation -- Incorporated
by Reference to Registration Statement on Form N-4, filed
on or about February 16, 1996 (File No. 333-01043; 811-
07543)
3(b) By-Laws -- Incorporated by Reference to
Registration Statement on Form N-4, filed on or about
February 16, 1996 (File No. 333-01043; 811-07543)
4(a) Form of Group Annuity Contract*
4(b) Form of Group Annuity Certificate*
4(c) Form of Individual Annuity Contract*
4(d) Group Annuity Application*
4(e) Group Annuity Certificate Application*
4(f) Individual Annuity Application*
4(g) Endorsements*
(i) Tax-Sheltered Annuity (TSA)
(ii) Corporate/Keogh 401(a) Plan (Group)
(iii) Corporate/Keogh 401(a) Plan (Individual)
(iv) Individual Retirement Annuity (IRA) (Group)
(v) Individual Retirement Annuity (IRA)
(Individual)
(vi) Qualified Plan Endorsement
5 Opinion regarding Legality*
21 Subsidiaries of the Registrant--Incorporated by
Reference to Registration Statement on Form S-1, filed on
or about March 18, 1996 (File No. 333-1783)
23(a) Consent of Counsel
23(b) Consent of Independent Auditors
24 Powers of Attorney--Incorporated by Reference to
Pre-Effective Amendment No. 1 to Registration Statement on
Form N-4 filed on or about August 22, 1996 (File No. 333-
1043; 811-7543)
27 Financial Data Schedule
Financial Statements
28(a) Schedule I**
28(b) Schedule III**
28(c) Schedule V**
* Incorporated by reference to Pre-Effective Amendment No 1 to Registration
Statement (File No. 333-13609) filed on or about February 7, 1997.
** Incorporated by reference to Post-Effective Amendment No 1 to Registration
Statement (File No. 333-1783) filed on or about April 18, 1997.
Item 17. Undertakings
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement;
(iii) To include any material information with respect
to the plan of distribution not previously disclosed in
the registration statement or any material change to such
information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing
of the registrant's annual report pursuant to Section 13(a) or Section
15(d) of the Securities Exchange Act of 1934 (and, where applicable, each
filing of an employee benefit plan's annual report pursuant to Section
15(d) of the Securities Exchange Act of 1934) that is incorporated by
reference in the registration statement shall be deemed to be a new
registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(5) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in connection
with the securities being registered, the registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as expressed
in the Act and will be governed by the final adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Boston,
State of Massachusetts on May 30, 1997.
KEYPORT LIFE INSURANCE COMPANY
BY: /s/ John W. Rosensteel*
John W. Rosensteel
President
* James J. Klopper has signed this document on the indicated date on behalf
of Mr. Rosensteel pursuant to a power of attorney duly executed by him
and included as part of Exhibit 16 in Pre-Effective Amendment No. 1 to
Registration Statement on Form N-4 filed on or about August 22, 1996
(File No. 333-1043; 811-7543).
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and the dates indicated.
Signature Title Date
(i) Principal Executive Officer
/s/ John W. Rosensteel* Principal Executive Officer
John W. Rosensteel
(ii) Principal Financial Officer
/s/ Paul H. LeFevre, Jr.* Senior Vice President and
Paul H. LeFevre, Jr. Chief Financial Officer
(iii) Majority of Board of Directors
/s/ Kenneth R. Leibler* *By: /s/ James J. Klopper
Kenneth R. Leibler James J. Klopper
Attorney-in-fact
/s/ F. Remington Ballou* May 30, 1997
F. Remington Ballou
/s/ Frederick Lippitt*
Frederick Lippitt
/s/ Robert C. Nyman*
Robert C. Nyman
/s/ John W. Rosensteel*
John W. Rosensteel
* James J. Klopper has signed this document on the indicated date on behalf
of each of the above Directors and Officers of the Registrant pursuant to
powers of attorney duly executed by such persons and included as part of
Exhibit 16 in Pre-Effective Amendment No. 1 to Registration Statement on
Form N-4 filed on or about August 22, 1996 (File No. 333-1043; 811-7543).
<PAGE>
EXHIBIT 23(a)
<PAGE>
CONSENT OF COUNSEL
I hereby consent to the use of my name in the caption "Legal Matters" in
the prospectus of Keyport Life Insurance Company contained in Form S-1.
Boston, Massachusetts /s/Bernard R. Beckerlegge
Bernard R. Beckerlegge
May 30, 1997
Date
<PAGE>
EXHIBIT 23(b)
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Keyport Life Insurance Company
We consent to the reference to our firm under the caption "Experts" and
to the use of our report dated February 5, 1997, in the Post-Effective
Amendment No. 1 to the Registration Statement (Form S-1 No. 333-13609) and
related Prospectus of Keyport LIfe Insurance Company dated May 30, 1997.
Boston, Massachusetts /s/Ernst & Young LLP
May 30, 1997
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Keyport Life Insurance Company
We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the prospectus.
Our report dated February 16, 1996, contains an explanatory paragraph that
refers to a change in accounting by the Company to adopt the provisions of
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equtiy Securities", effective January 1, 1994.
Boston, Massachusetts /s/KPMG Peat Marwick LLP
May 30, 1997
<PAGE>
EXHIBIT 27
<PAGE>
[ARTICLE] 7 Financial Data Schedule
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] DEC-31-1996
[PERIOD-END] DEC-31-1996
[DEBT-HELD-FOR-SALE] 0
[DEBT-CARRYING-VALUE] 10,718,644
[DEBT-MARKET-VALUE] 0
[EQUITIES] 35,863
[MORTGAGE] 67,005
[REAL-ESTATE] 0
[TOTAL-INVEST] 11,537,927
[CASH] 767,385
[RECOVER-REINSURE] 0
[DEFERRED-ACQUISITION] 250,355
[TOTAL-ASSETS] 13,924,557
[POLICY-LOSSES] 0
[UNEARNED-PREMIUMS] 0
[POLICY-OTHER] 11,396
[POLICY-HOLDER-FUNDS] 11,626,132
[NOTES-PAYABLE] 0
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 3,015
[OTHER-SE] 977,767
[TOTAL-LIABILITY-AND-EQUITY] 13,924,557
[PREMIUMS] 0
[INVESTMENT-INCOME] 790,365
[INVESTMENT-GAINS] 5,509
[OTHER-INCOME] 33,534
[BENEFITS] 3,477
[UNDERWRITING-AMORTIZATION] 0
[UNDERWRITING-OTHER] 0
[INCOME-PRETAX] 137,846
[INCOME-TAX] 47,222
[INCOME-CONTINUING] 0
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 90,624
[EPS-PRIMARY] 0
[EPS-DILUTED] 0
[RESERVE-OPEN] 0
[PROVISION-CURRENT] 0
[PROVISION-PRIOR] 0
[PAYMENTS-CURRENT] 0
[PAYMENTS-PRIOR] 0
[RESERVE-CLOSE] 0
[CUMULATIVE-DEFICIENCY] 0
