SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to ____________________
Commission file numbers 33-3630 and 333-1783
KEYPORT LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
Rhode Island 05-0302931
(State of other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
125 High Street, Boston, Massachusetts 02110-2712
(Address of principal executive offices) (Zip Code)
(617) 526-1400
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
[X] Yes [ ] No
There were 2,412,000 shares of the registrant's Common Stock, $1.25
par value, outstanding as of September 30, 1998.
Exhibit Index - Page 15 Page 1 of 16
KEYPORT LIFE INSURANCE COMPANY
QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 1998
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1998
and December 31, 1997 3
Consolidated Income Statements for the Three and
Nine Month Periods Ended September 30, 1998 and 1997 4
Consolidated Statements of Cash Flows for
the Nine Month Periods Ended September 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 8-13
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
Exhibit Index 15
KEYPORT LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30, December 31,
ASSETS 1998 1997
Unaudited
Cash and investments:
Fixed maturities available for sale
(amortized cost: 1998 - $11,240,610;
1997 - $10,981,618) $ 11,447,201 $ 11,246,539
Equity securities (cost: 1998 - $43,420;
1997 - $21,950) 55,498 40,856
Mortgage loans 56,372 60,662
Policy loans 579,498 554,681
Other invested assets 442,268 440,773
Cash and cash equivalents 1,261,299 1,162,347
Total cash and investments 13,842,136 13,505,858
Accrued investment income 162,318 165,035
Deferred policy acquisition costs 281,471 232,039
Value of insurance in force 55,322 53,298
Intangible assets 18,396 18,058
Income taxes recoverable 5,147 22,537
Receivable for investments sold 155,498 1,398
Other assets 24,458 14,777
Separate account assets 1,433,486 1,329,189
Total assets $ 15,978,232 $ 15,342,189
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Policy liabilities $ 12,342,529 $ 12,086,076
Deferred income taxes 119,004 133,003
Payable for investments purchased and loaned 931,382 722,116
Other liabilities 38,555 34,015
Separate account liabilities 1,395,131 1,263,958
Total liabilities 14,826,601 14,239,168
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
Accumulated other comprehensive income 55,967 82,277
Retained earnings 586,716 511,796
Total stockholder's equity 1,151,631 1,103,021
Total liabilities and stockholder's equity $15,978,232 $15,342,189
See accompanying notes
KEYPORT LIFE INSURANCE COMPANY
CONSOLIDATED INCOME STATEMENTS
(in thousands)
Unaudited
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
Investment income $ 201,158 $ 210,365 $ 608,188 $ 627,535
Interest credited to
Policyholders 143,271 150,875 425,605 445,412
Investment spread 57,887 59,490 182,583 182,123
Net realized investment gains 4,112 4,951 2,447 20,417
Fee income:
Surrender charges 4,384 4,180 14,004 11,481
Separate account fees 5,352 4,774 15,454 12,723
Management fees 769 887 3,324 2,467
Total fee income 10,505 9,841 32,782 26,671
Expenses:
Policy benefits (386) (920) (1,406) (3,075)
Operating expenses (10,817) (12,740) (39,967) (36,805)
Amortization of deferred
policy acquisition costs (15,465) (18,273) (52,786) (54,013)
Amortization of value of
insurance in force (1,178) (2,191) (3,870) (7,258)
Amortization of intangible
Assets (314) (282) (942) (846)
Total expenses (28,160) (34,406) (98,971) (101,997)
Income before income taxes 44,344 39,876 118,841 127,214
Income tax expense (14,565) (13,499) (38,921) (43,202)
Net income $ 29,779 $ 26,377 $ 79,920 $ 84,012
See accompanying notes
KEYPORT LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Unaudited
Nine Months Ended
September 30,
1998 1997
Cash flows from operating activities:
Net income $ 79,920 $ 84,012
Adjustments to reconcile net income to net cash
provided by operating activities:
Interest credited to policyholders 425,606 445,412
Net realized investment gains (2,447) (20,417)
Amortization of value of insurance in force
and intangible assets 4,812 8,104
Net amortization on investments 101,918 21,983
Change in deferred policy
acquisition costs (25,761) (10,346)
Change in current and deferred
income taxes 12,158 31,582
Net change in other assets
and liabilities 14,896 (16,695)
Net cash provided by operating
activities 611,102 543,635
Cash flows from investing activities:
Investments purchased - available for sale (5,207,431) (3,006,409)
Investments sold - available for sale 4,060,558 1,414,198
Investments matured - available for sale 938,164 1,230,537
Increase in policy loans (24,817) (15,031)
Decrease in mortgage loans 4,290 4,603
Other invested assets purchased, net 33,394
Value of business acquired, net of cash (3,999)
Net cash used in investing activities (199,841) (372,102)
Cash flows from financing activities:
Withdrawals from policyholder accounts (1,371,637) (948,879)
Deposits to policyholder accounts 1,089,325 738,427
Dividends paid (5,000)
Securities lending (24,997) 415,867
Net cash (used in) provided by
financing activities (312,309) 205,415
Change in cash and cash equivalents 98,952 376,948
Cash and cash equivalents at beginning of period 1,162,347 767,385
Cash and cash equivalents at end of period $ 1,261,299 $ 1,144,333
See accompanying notes
KEYPORT LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
1. General
In the opinion of management, all adjustments consisting of normal
recurring accruals which are necessary for a fair presentation of the
financial position of Keyport Life Insurance Company (the Company) at
September 30, 1998 and December 31, 1997, and its cash flows and results of
its operations for the three month and nine month periods ended September
30, 1998 and 1997, have been made. Certain footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to
the rules and regulations of the Securities and Exchange Commission.
Therefore, these consolidated financial statements should be read in
conjunction with the audited consolidated financial statements contained in
the Company's 1997 Form 10-K. The results of operations for the three and
nine month periods ended September 30, 1998 are not necessarily indicative
of the results to be expected for the full year. Certain previously
reported amounts have been reclassified to conform with the current period
presentation.
2. Investments
The Company's general investment policy is to hold fixed maturity assets
for long-term investment and, accordingly, the Company does not have a
trading portfolio. To provide for maximum portfolio flexibility and enable
appropriate tax planning, the Company classifies fixed maturity investments
as "available for sale", which are carried at fair value.
3. Acquisitions
On January 2, 1998, the Company acquired the common stock of American
Benefit Life Insurance Company, renamed Keyport Benefit Life Insurance
Company on March 31, 1998, a New York insurance company, for $7.4 million.
The acquisition was accounted for as a purchase and, accordingly, operating
results are included in the consolidated financial statements from the date
of acquisition. In connection with the acquisition, the Company acquired
assets with a fair value of $9.4 million and assumed liabilities of $3.2
million.
4. Recent Accounting Change
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 "Reporting Comprehensive Income" (SFAS 130).
SFAS 130 establishes new rules for the reporting and display of
comprehensive income and its components; however, the adoption of this
statement did not have any impact on the Company's net income or
stockholder's equity. SFAS 130 requires unrealized gains or losses on the
Company's available-for-sale securities, which prior to adoption were
reported separately in stockholder's equity, to be included in accumulated
other comprehensive income. Prior year financial statements have been
reclassified to conform to the requirements of SFAS 130.
KEYPORT LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Unaudited
Total comprehensive income, net of tax, for the nine month periods ended
September 30, 1998 and 1997, amounted to $53.6 million and $109.3 million,
respectively.
5. Recent Accounting Prouncement
In June 1998, Statement of Financial Accounting Standards No. 133
"Accounting for Derivative Instruments and Hedging Activities", was issued.
This statement standardizes the accounting for derivative instruments and
the derivative portion of certain other contracts that have similar
characteristics by requiring that an entity recognize those instruments at
fair value. This statement also requires a new method of accounting for
hedging transactions, prescribes the type of items and transactions that
may be hedged, and specifies detailed criteria to be met to qualify for
hedge accounting. This statement is effective for fiscal years beginning
after June 15, 1999. Earlier adoption is permitted. The Company is
evaluating the impact of this statement. Upon adoption, the Company will
be required to record a cumulative effect adjustment to reflect this
accounting change. At this time, the Company has not completed its
analysis and evaluation of the requirements and the impact of this
statement.
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition
Results of Operations
Net income was $29.8 million for the third quarter of 1998 compared to
$26.4 million for the third quarter of 1997. Year-to-date, net income was
$79.9 million compared to $84.0 million in the prior year. The increase in
the third quarter is attributable to decreases in operating expenses and
amortization on deferred policy acquisition costs and increases in fee
income, partially offset by decreases in investment spread and increases in
income tax expense. The year-to-date decrease is due to a decline in net
realized investment gains, partially offset by higher fee income and lower
income tax expense.
Investment spread is the amount by which investment income earned on
the Company's investments exceeds interest credited on policyholder
balances. Investment spread was $57.9 million for the third quarter of
1998 compared to $59.5 million for the third quarter of 1997. The amount
by which the average yield on investments exceeds the average interest
credited rate on policyholder balances is the investment spread percentage,
which amounted to 1.58% in the third quarter of 1998 and 1.75% in the third
quarter of 1997. For the first nine months of 1998, investment spread was
$182.6 million compared to $182.1 million for the first nine months of
1997. The investment spread percentage was 1.71% for the first nine months
of 1998 compared to 1.84% for the first nine months of 1997.
Investment income was $201.2 million for the third quarter of 1998
compared to $210.4 million for the third quarter of 1997. The decrease of
$9.2 million in 1998 compared to 1997 primarily relates to a $17.6 million
decrease resulting from a lower average investment yield, partially offset
by a $8.4 million increase as a result of a higher level of average
invested assets. The third quarter 1998 investment income was net of $17.9
million of S&P 500 Index call option amortization expense related to the
Company's equity-indexed annuities compared to $13.6 million in the third
quarter of 1997. The average investment yield was 6.20% in the third
quarter of 1998 compared to 6.77% in the third quarter of 1997. Year-to-
date, investment income was $608.2 million compared to $627.5 million in
the prior year. The decrease of $19.3 million in 1998 compared to 1997 is
attributable to a $46.1 million decrease resulting from a lower average
investment yield, partially offset by a $26.8 million increase as a result
of a higher level of average invested assets. The first nine months of
1998 investment income included $53.1 million of S&P 500 Index call option
amortization expense related to the Company's equity-indexed annuities
compared to $31.2 million in the prior year. The average investment yield
was 6.35% for the first nine months of 1998 compared to 6.86% for the first
nine months of 1997.
Interest credited to policyholders totaled $143.3 million for the
third quarter of 1998 compared to $150.9 million for the third quarter of
1997. The decrease of $7.6 million in 1998 compared to 1997 relates to a
$12.0 million decrease resulting from a lower average interest credited
rate, partially offset by a $4.4 million increase as a result of a higher
level of average policyholder balances. Policyholder balances averaged
$12.4 billion for the third quarter of 1998 ($10.6 billion of fixed
products, consisting of fixed annuities and the closed block of single
premium whole life insurance, and $1.8 billion of equity-indexed annuities)
compared to $12.0 billion ($10.7 billion of fixed products and $1.3 billion
of equity-indexed annuities) for the third quarter of 1997. The average
interest credited rate was 4.62% (5.29% on fixed products and .85% on
equity-indexed annuities) for the third quarter of 1998 compared to 5.02%
(5.52% on fixed products and .85% on equity-indexed annuities) in the third
quarter of 1997. The Company's equity-indexed annuities credit interest to
the policyholder at a "participation rate" equal to a portion (ranging for
existing policies from 40% to 95%) of the change in value of the S&P 500
Index. The Company's equity-indexed annuities also provide full guarantee
of principal if held to term, plus interest at 0.85% annually. For each of
the periods presented, the interest credited to equity-indexed
policyholders related to the participation rate is reflected net of income
recognized on the S&P 500 Index call options resulting in a .85% net
credited rate. For the first nine months of 1998, interest credited to
policyholders totaled $425.6 million compared to $445.4 million for the
first nine months of 1997. The decrease of $19.8 million in the first nine
months of 1998 compared to the first nine months of 1997 is due to a $33.2
million decrease resulting from a lower average interest credited rate,
partially offset by a $13.4 million increase as a result of a higher level
of average policyholder balances. Policyholder balances averaged $12.2
billion ($10.5 billion of fixed products and $1.7 billion of equity-indexed
annuities) for the first nine months of 1998 compared to $11.8 billion
($10.7 billion of fixed products and $1.1 billion of equity-indexed
annuities) for the first nine months of 1997. The average year-to-date
interest credited rate was 4.64% (5.30% on fixed products and .85% on
equity-indexed annuities) in 1998 compared to 5.02% (5.44% on fixed
products and .85% on equity-indexed annuities) in 1997.
Average investments in the Company's general account (computed without
giving effect to SFAS 115), including a portion of the Company's cash and
cash equivalents, were $13.0 billion for the third quarter of 1998 compared
to $12.4 billion in the third quarter of 1997. For the first nine months
of 1998, such average investments were $12.8 billion compared to $12.2
billion in the prior year. These increases primarily relate to
reinvestment of portfolio earnings.
Net realized investment gains were $4.1 million in the third quarter
of 1998 compared to net realized investment gains of $5.0 million in the
third quarter of 1997. Year-to-date, net realized investment gains were
$2.4 million, which is net of losses of $7.6 million for certain fixed
maturity investments where the decline in value was determined to be other
than temporary, compared to net realized investment gains of $20.4 million
in 1997. Sales of fixed maturity investments generally are made to
maximize total return.
Surrender charges are revenues earned on the early withdrawal of
fixed, equity-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 $4.4 million in the third quarter of 1998 compared
to $4.2 million in 1997. Year-to-date, surrender charges were $14.0
million compared to $11.5 million in 1997.
On an annualized basis, total fixed, equity-indexed and variable
annuity withdrawals represented 12.4% and 10.9% of the total average
annuity policyholder and separate account balances for the third quarter of
1998 and 1997, respectively, and 13.7% and 11.0% of the total average
policyholder and separate account balances for the first nine months of
1998 and 1997, respectively.
Separate account fees are primarily mortality and expense charges
earned on variable annuity and variable life policyholder balances. These
fees, which are based on the market values of the assets supporting the
contracts in separate accounts, were $5.4 million in the third quarter of
1998 compared to $4.8 million in 1997. Such fees represented 1.53% and
1.61% of average variable annuity and variable life separate account
balances for the third quarters of 1998 and 1997, respectively. Year-to-
date, separate account fees were $15.5 million compared to $12.7 million in
1997. These fees represented 1.50% and 1.56% of average variable annuity
and variable life separate account balances for the first nine months of
1998 and 1997, 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, redemptions, and changes
in the market values of the investments managed. Management fees were $0.8
million in the third quarter of 1998 compared to $0.9 million in the third
quarter of 1997. Year-to-date, management fees were $3.3 million compared
to $2.5 million in 1997. The year to date increase of $0.8 reflects a
higher level of average assets under management.
Operating expenses primarily represent compensation and other general
and administrative expenses. These expenses were $10.8 million in the
third quarter of 1998 compared to $12.8 million in the third quarter of
1997. For the first nine months of 1998, operating expenses were $40.0
million compared to $36.8 million in the prior year. The year to date
increase in 1998 is primarily due to higher employee related expenses.
Amortization of deferred policy acquisition costs relates to the costs
of acquiring new business which vary with, and are primarily related to,
the production of new annuity business. Such costs include commissions,
costs of policy issuance and underwriting and selling expenses.
Amortization was $15.5 million in the third quarter of 1998 compared to
$18.3 million in the third quarter of 1997. Amortization of deferred
policy acquisition costs was $52.8 million for the nine months ended
September 30, 1998 compared to $54.0 million for the nine months ended
September 30, 1997.
Amortization of value of insurance in force relates to the actuarially-
determined present value of projected future gross profits from policies in
force at the date of acquisition. Amortization totaled $1.2 million in the
third quarter of 1998 compared to $2.2 million in 1997. Amortization of
value of insurance in force totaled $3.9 million for the nine months ended
September 30, 1998 compared to $7.3 million for the nine months ended
September 30, 1997. These decreases in amortization in 1998 compared to
1997 are due to a change in mortality assumptions.
Federal income tax expense was $14.6 million or 32.9% of pretax income
in the third quarter of 1998 compared to $13.5 million, or 33.9% of pretax
income in the third quarter of 1997. Year-to-date, federal income tax
expense was $38.9 million or 32.8% of pretax income, compared to $43.2
million or 34.0% of pretax income for the first nine months of 1997.
Financial Condition
Stockholder's Equity as of September 30, 1998 was $1.152 billion
compared to $1.103 billion as of December 31, 1997. The increase in
stockholder's equity of $48.6 million was due to $79.9 million of net
income for the period, partially offset by a decline in net unrealized
investment gains of available for sale securities of $26.3 million and a
$5.0 million dividend paid to the parent company.
Investments not including cash and cash equivalents totaled $12.6
billion at September 30, 1998 compared to $12.3 billion at December 31,
1997.
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 fixed maturity
portfolio as "available for sale" and carries such investments at fair
value. The Company's total investments at September 30, 1998 and December
31, 1997 reflected net unrealized gains of $204.5 million and $285.4
million, respectively, relating to its fixed maturity and equity
portfolios.
Approximately $11.3 billion, or 81.6%, of the Company's general
account investments at September 30, 1998, was rated by Standard & Poor's
Corporation, Moody's Investors Service or under comparable statutory rating
guidelines established by the NAIC. At September 30, 1998, the carrying
value of investments in below investment grade securities totaled $1.2
billion, or 8.3% of general account investments of $13.8 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 may be more limited than for investment grade
securities.
Management of the Company's Investments
Asset-liability duration management is utilized by the Company to minimize
the risks of interest rate fluctuations and policyholder withdrawals. 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 acceptable risk-adjusted
returns by effectively managing portfolio 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 an acceptable spread between what
it earns on its assets and interest credited on its policyholder balances
by investing principally in fixed maturities. The Company's fixed-rate
products incorporate surrender charges to encourage persistency and make
the cost of its policyholder balances more predictable. Approximately
80.5% of the Company's fixed annuity policyholder balances were subject to
surrender charges at September 30, 1998.
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 toward maintaining a desired investment spread
between the yield on portfolio assets and the interest credited on its
policyholder balances under a variety of possible future interest rate
scenarios. At September 30, 1998 the effective duration of the Company's
fixed maturities investments (including certain cash and cash equivalents)
was approximately 2.9. Effective duration is a common measure for the
price sensitivity of a fixed-income portfolio to changes in interest rates.
It measures the approximate percentage change in the market value of a
portfolio when interest rates change by 100 basis points. This measure
includes the impact of estimated changes in portfolio cash flows from
features such as prepayments and bond calls.
As a component of its investment strategy and to reduce its exposure to
interest rate risk, the Company utilizes interest rate swap agreements and
interest rate cap agreements to match assets more closely to liabilities.
Swap agreements are agreements to exchange with a 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 earned on longer-term fixed-rate assets with interest
credited to policyholders. The Company had 38 and 45 outstanding swap
agreements with an aggregate notional principal amount of $2.3 billion and
$2.6 billion at September 30, 1998 and December 31, 1997, respectively.
Cap agreements are agreements with a counterparty which require the payment
of a premium for the right to receive payments for the difference between
the cap interest rate and a market interest rate on specified future dates
based on an underlying principal balance (notional principal) to hedge
against rising interest rates. The Company had interest rate cap
agreements with an aggregate notional amount of $250.0 million as of
September 30, 1998 and December 31, 1997, respectively.
With respect to the Company's equity-indexed annuities, the Company buys
call options on the S&P 500 Index to hedge its obligations to provide
returns based upon this index. The Company had call options with a book
value of $329.6 million and $323.3 million as of September 30, 1998 and
December 31, 1997, respectively.
There are risks associated with some of the techniques the Company uses to
match its assets and liabilities. The primary risk associated with swap,
cap and call option agreements is counterparty nonperformance. The Company
believes that the counterparties to its swap, cap and call option
agreements are financially responsible and that the counterparty risk
associated with these transactions is minimal. In addition, swap and cap
agreements have interest rate risk and call options have stock market risk.
These swap and cap agreements hedge fixed-rate assets and the Company
expects that any interest rate movements that adversely affect the market
value of swap and cap agreements would be offset by changes in the market
values of such fixed rate assets. However, there can be no assurance that
these hedges will be effective in offsetting the potential adverse effects
of changes in interest rates. Similarly, the call options hedge the
Company's obligations to provide returns on equity-indexed annuities based
upon the S&P 500 Index, and the Company believes that any stock market
movements that adversely affect the market value of S&P 500 Index call
options would be substantially offset by a reduction in policyholder
liabilities. However, there can be no assurance that these hedges will be
effective in offsetting the potentially adverse effects of changes in S&P
500 Index levels. The Company's profitability could be adversely affected
if the value of its swap and cap agreements increase less than (or decrease
more than) the change in the market value of its fixed rate assets and/or
if the value of its S&P 500 call options increase less than (or decrease
more than) the value of the guarantees made to equity-indexed
policyholders.
The Company routinely reviews its portfolio of investment securities. The
Company identifies monthly any investments that require additional
monitoring, and carefully reviews the carrying value of such investments at
least quarterly to determine whether specific investments should be placed
on a nonaccrual basis and to determine declines in value that may be other
than temporary. In making these reviews, the Company principally considers
the adequacy of collateral (if any), compliance with contractual covenants,
the borrower's recent financial performance, news reports and other
externally generated information concerning the creditor's affairs. In the
case of publicly traded fixed maturity investments, management also
considers market value quotations, if available.
Liquidity
The Company's liquidity needs and financial resources pertain to the
management of the general account assets and policyholder balances. The
Company uses cash for the payment of annuity and life insurance benefits,
operating expenses, policy acquisition costs, and the purchase of
investments. The Company generates cash from annuity premiums and
deposits, net investment income, 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
September 30, 1998, $10.2 billion, or 73.6%, of the Company's general
account 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.
Although no assurance can be given, the Company believes that liquidity to
fund withdrawals would be available through incoming cash flow, the sale of
short-term or floating-rate instruments, thereby precluding the sale of
fixed maturity investments in a potentially unfavorable market.
Current Rhode Island insurance law permits the payment of dividends or
distributions from the Company to Liberty Financial, which, together with
dividends and distributions paid during the preceding 12 months, do not
exceed 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. Any proposed dividend in excess of this amount is called an
"extraordinary dividend" and may not be paid until it is approved by the
Commissioner of Insurance of the State of Rhode Island. As of September
30, 1998, the amount of additional dividends that the Company could pay
without such approval was $65.3 million.
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.
Year 2000
Many companies and organizations have computer programs that use only two
digits to identify a year in the date field. These programs were designed
and developed without considering the impact of the upcoming change in the
century. If not corrected, this could cause a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions.
In addressing the Year 2000 issue, the Company has substantially completed
an inventory of its computer programs and assessed its Year 2000 readiness.
The Company's computer programs include internally developed programs,
third-party purchased programs and third-party custom developed programs.
For programs which were identified as not being Year 2000 ready, the
Company is in the process of implementing a remedial plan which includes
repairing or replacing the programs and appropriate testing for Year 2000.
The Company is also in the process of identifying and reviewing its non-
information technology systems with respect to Year 2000 issues. In
addition, the Company has initiated communication with third parties to
determine the extent to which the Company's interface systems are
vulnerable to those third parties' failure to remediate their own Year 2000
issues.
The Company is developing, and will continue to develop, contingency plans
for dealing with any adverse effects that become likely in the event the
Company's remediation plans are not successful or third parties fail to
remediate their own Year 2000 issues. If necessary modifications and
conversions are not made, or are not timely completed, or if the systems of
the companies on which the Company's interface system relies are not timely
converted, the Year 2000 issues could have a material impact on the
operations of the Company. However, the Company believes that with
modifications to existing software and conversions to new software, the
Year 2000 issue will not pose significant operational problems for its
computer systems.
In the opinion of management, the cost of addressing the Year 2000 issue is
not expected to have a material adverse effect on the Company's financial
condition or its results of operation.
Effects of Inflation
Inflation has not had a material effect on the Company's consolidated
results of operations to date. 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. For example, if interest rates
decline the Company's fixed maturity investments generally will increase in
fair value, while net investment income will decrease as fixed maturity
investments mature or are sold and the proceeds are reinvested at reduced
rates. However, inflation may result in increased operating expenses that
may not be readily recoverable in the prices of the services charged by the
Company.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit
#27 Financial Data Schedule - page 16
(b) Reports on Form 8-K
There were no reports filed on Form 8-K during the quarter ended
September 30, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KEYPORT LIFE INSURANCE COMPANY
_________/s/ Bernhard M. Koch__________
Bernhard M. Koch
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
_________/s/ Jeff Whitehead__________
Jeff Whitehead
Vice President and Treasurer
(Chief Accounting Officer)
Date: November 12, 1998
Exhibit Index
Exhibit No. Description Page
27 Financial Data Schedule 16
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