<PAGE>
File Nos. 333-63093
811-6632
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 2
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 25
ALLMERICA SELECT SEPARATE ACCOUNT OF
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(Exact Name of Registrant)
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(Name of Depositor)
440 Lincoln Street
Worcester, MA 01653
(Address of Depositor's Principal Executive Offices)
(508) 855-1000
(Depositor's Telephone Number, including Area Code)
Abigail M. Armstrong, Secretary and Counsel
Allmerica Financial Life Insurance and Annuity Company
440 Lincoln Street
Worcester, MA 01653
(Name and Address of Agent for Service of Process)
It is proposed that this filing will become effective:
___ immediately upon filing pursuant to paragraph (b) of Rule 485
_X_ on May 1, 1999 pursuant to paragraph (b) of Rule 485
___ 60 days after filing pursuant to paragraph (a) (1) of Rule 485
___ on (date) pursuant to paragraph (a) (1) of Rule 485
___ this post-effective amendment designates a new effective
___ date for a previously filed post-effective amendment
VARIABLE ANNUITY CONTRACTS
Pursuant to Reg. Section 270.24f-2 of the Investment Company Act of 1940 ("1940
Act"), Registrant hereby declares that an indefinite amount of its securities is
being registered under the Securities Act of 1933 ("1933 Act"). The Rule 24f-2
Notice for the issuer's fiscal year ended December 31, 1998 was filed on or
before March 30, 1999.
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CROSS REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS OF
ITEMS CALLED FOR BY FORM N-4
<TABLE>
<CAPTION>
FORM N-4 ITEM NO. CAPTION IN PROSPECTUS
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<S> <C>
1. . . . . . . . . . . . . . .Cover Page
2. . . . . . . . . . . . . . .Special Terms
3. . . . . . . . . . . . . . .Summary of Fees and Expenses; Summary of Contract Features
4. . . . . . . . . . . . . . .Condensed Financial Information; Performance Information
5. . . . . . . . . . . . . . .Description of the Companies, the Variable Accounts, the
Trust, Fidelity VIP, and T. Rowe Price
6. . . . . . . . . . . . . . .Charges and Deductions
7. . . . . . . . . . . . . . .Description of the Contract
8. . . . . . . . . . . . . . .Electing the Form of Annuity and Annuity Date; Description of Variable
Annuity Payout Options; Annuity Benefit Payments
9. . . . . . . . . . . . . . .Death Benefit
10 . . . . . . . . . . . . . .Payments; Computation of Values; Distribution
11 . . . . . . . . . . . . . .Surrender; Withdrawals; Texas Optional Retirement Program
12 . . . . . . . . . . . . . .Federal Tax Considerations
13 . . . . . . . . . . . . . .Legal Matters
14 . . . . . . . . . . . . . .Statement of Additional Information - Table of Contents
FORM N-4 ITEM NO. CAPTION IN STATEMENT OF ADDITIONAL INFORMATION
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<S> <C>
15 . . . . . . . . . . . . . .Cover Page
16 . . . . . . . . . . . . . .Table of Contents
17 . . . . . . . . . . . . . .General Information and History
18 . . . . . . . . . . . . . .Services
19 . . . . . . . . . . . . . .Underwriters
</TABLE>
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<TABLE>
<CAPTION>
<S> <C>
20 . . . . . . . . . . . . . .Underwriters
21 . . . . . . . . . . . . . .Performance Information
22 . . . . . . . . . . . . . .Annuity Benefit Payments
23 . . . . . . . . . . . . . .Financial Statements
</TABLE>
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ALLMERICA FINANCIAL LIFE INSURANCE
AND ANNUITY COMPANY
FIRST ALLMERICA FINANCIAL LIFE
INSURANCE COMPANY
ALLMERICA SELECT CHARTER
VARIABLE ANNUITY CONTRACT
PROFILE THIS PROFILE IS A SUMMARY OF SOME OF THE MORE
MAY 1, 1999 IMPORTANT POINTS THAT YOU SHOULD KNOW AND CONSIDER
BEFORE PURCHASING THE ALLMERICA SELECT CHARTER
VARIABLE ANNUITY CONTRACT. THE CONTRACT IS MORE
FULLY DESCRIBED LATER IN THIS PROSPECTUS. PLEASE
READ THE PROSPECTUS CAREFULLY.
1. THE ALLMERICA SELECT CHARTER VARIABLE ANNUITY CONTRACT
The Allmerica Select Charter variable annuity contract is a contract between you
and Allmerica Financial Life Insurance and Annuity Company (for contracts issued
in the District of Columbia, Puerto Rico, the Virgin Islands and any state
except Hawaii and New York) or First Allmerica Financial Life Insurance Company
(for contracts issued in Hawaii and New York). It is designed to help you
accumulate assets for your retirement or other important financial goals on a
tax-deferred basis.
The Allmerica Select Charter variable annuity contract offers a diverse
selection of money managers and investment options. You may allocate your
payments among any of 14 variable investment portfolios, a number of Guarantee
Period Accounts and the Fixed Account. This range of investment choices enables
you to allocate your money to meet your particular investment needs. Transfers
between accounts do not create a taxable event.
Variable investments are subject to fluctuations in market value, and may
increase or decrease the value of your contract over time. Investments in either
the Fixed Account or the Guarantee Period Accounts offer rates of return and
protection of principal that are guaranteed by the Company.
Deferred annuities typically have two phases; an ACCUMULATION PHASE and, if you
annuitize, an ANNUITY PAYOUT PHASE. During the ACCUMULATION PHASE you can make
payments into the contract on any frequency. Earnings from your investments
accumulate on a tax-deferred basis. You may withdraw money during the
accumulation phase; however as with any tax-deferred investment, earnings and
pre-tax payments are subject to income tax when withdrawn. A federal tax penalty
may apply if you withdraw money prior to age 59 1/2. The ANNUITY PAYOUT PHASE
occurs when you, or the payee you designate, begin receiving regular annuity
benefit payments from your contract. The amount of money you are able to
accumulate in your contract during the ACCUMULATION PHASE will determine the
amount of the annuity benefit payments during the ANNUITY PAYOUT PHASE. This
accumulation is based on the amount of your payments, and any gain or loss from
your investments.
2. ANNUITY PAYMENTS
Before you, or the payee you designate, begin to receive payments from your
annuity, you will want to decide the form those payments will take. For regular
income from your annuity, you may select one of six annuity options: (1)
periodic payments for the annuitant's lifetime; (2) periodic payments for the
annuitant's lifetime, but not for less than 120 months; (3) periodic payments
for the annuitant's lifetime with the guarantee that if payments are less than
the accumulated value at annuitization, a refund of the remaining value will be
paid; (4) periodic payments for the annuitant's lifetime and one other
individual's (i.e. the beneficiary or a joint annuitant) lifetime; (5) periodic
payments for the annuitant's lifetime and one other individual's lifetime with
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the payment during the lifetime of the survivor being reduced to 2/3; and (6)
periodic payments for a specified period of 1 to 30 years. Other annuity options
may be offered by the Company.
You can also choose whether you want the annuity benefit payments on a variable
basis (subject to fluctuation based on investment performance), on a fixed basis
(with benefit payments guaranteed at a fixed amount), or on a combination
variable and fixed basis. Once annuity benefit payments begin, the annuity
option cannot be changed.
3. PURCHASING THIS CONTRACT
Allmerica Select Charter contracts are sold through a network of independent
financial representatives. We suggest you and your representative review this
information and that your representative assist you in completing any forms. The
initial payment into this contract must be at least $25,000 and each subsequent
payment must be at least $100. Other than these conditions, there is no fixed
schedule for making payments, nor any limits as to payment frequency.
4. INVESTMENT OPTIONS
You may allocate money to the Sub-Accounts investing in the following funds:
<TABLE>
<CAPTION>
FUND INVESTMENT ADVISER
--------------------------------------------- ---------------------------------------------
<S> <C> <C>
International Funds Select Emerging Markets Fund Schroder Capital Management International
Inc.
Select International Equity Fund Bank of Ireland Asset Management (U.S.)
Limited
T. Rowe Price International Stock Portfolio Rowe Price-Fleming International, Inc.
Aggressive Growth Funds Select Aggressive Growth Fund Nicholas-Applegate Capital Management, L.P.
Select Capital Appreciation Fund T. Rowe Price Associates, Inc.
Select Value Opportunity Fund Cramer Rosenthal McGlynn, LLC
Growth Funds Select Growth Fund Putnam Investment Management, Inc.
Select Strategic Growth Fund Cambiar Investors, Inc.
Fidelity VIP Growth Portfolio Fidelity Management & Research Company
Growth and Income Funds Select Growth and Income Fund J.P. Morgan Investment Management Inc.
Fidelity VIP Equity-Income Portfolio Fidelity Management & Research Company
High Income Fund Fidelity VIP High Income Portfolio Fidelity Management & Research Company
Income Fund Select Income Fund Standish, Ayer & Wood, Inc.
Money Market Fund Money Market Fund Allmerica Asset Management, Inc.
</TABLE>
You may also allocate money among the Guarantee Period Accounts and the Fixed
Account. The Guarantee Period Accounts offer interest rates that are guaranteed
for a specific period of time. The Fixed Account guarantees a minimum rate of
interest which may vary from time to time but will not be less than 3%.
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5. EXPENSES
The contract has insurance features and investment features, and there are costs
related to each. Each year a $35 contract fee is deducted from your contract.
(This fee may vary by state. See your contract for more information.) This
charge is waived if the value of the contract is at least $75,000 on the date
the fee is assessed. Also, insurance charges are deducted at a total annual rate
of 1.40% of the average daily value of amounts allocated to the investment
portfolios. In addition, if you elect the optional Minimum Guaranteed Annuity
Payout Rider, we will deduct a monthly charge against the accumulated value of
your contract at an annual rate of 0.25% for a rider with a ten-year waiting
period and at an annual rate of 0.15% for a rider with a fifteen-year waiting
period and if you elect the optional Enhanced Death Benefit Rider, we will
deduct a charge against the accumulated value of your contract at an annual rate
of 0.25%.
There are also investment management charges which in 1998 ranged from an annual
rate of 0.32% to 2.19% of the average daily value of the investment portfolio,
depending upon the investment portfolio. When you make a withdrawal and you, or
the payee you designate, begin receiving regular annuity benefit payments from
your annuity, a state premium tax, which varies depending upon the state of
residency, may apply.
The following chart is designed to help you understand the charges in your
contract. The column "Total Annual Charges" combines the annual contract fee
(which is represented as 0.04%), the 1.40% insurance charges and the investment
charges for each fund. Optional rider charges are not included. The next two
columns show two examples of the charges you would pay in dollar amounts. The
examples assume you invest $1,000, earn 5% annually and withdraw your money: (1)
at the end of year 1, and (2) at the end of year 10. Year 1 includes Total
Annual Charges. Year 10, shows the aggregate of all the annual charges assessed
for 10 years. Premium tax is assumed to be 0% in both examples. The following
chart does not reflect the optional Minimum Guaranteed Annuity Payout Rider or
the optional Enhanced Death Benefit Rider charges which, if elected, would
increase the Total Annual Insurance Charges.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
EXAMPLES:
TOTAL ANNUAL
EXPENSES AT
END OF
-----------------
TOTAL ANNUAL TOTAL ANNUAL TOTAL ANNUAL (1) (2)
FUND INSURANCE CHARGES FUND CHARGES CHARGES 1 YEAR 10 YEARS
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Select Emerging Markets Fund*........ 1.44% 2.19% 3.63% $ 36 $ 386
Select International Equity Fund..... 1.44% 1.02% 2.46% $ 25 $ 276
T. Rowe Price International Stock
Portfolio.......................... 1.44% 1.05% 2.49% $ 25 $ 279
Select Aggressive Growth Fund........ 1.44% 0.95% 2.39% $ 24 $ 269
Select Capital Appreciation Fund..... 1.44% 1.04% 2.48% $ 25 $ 278
Select Value Opportunity Fund........ 1.44% 0.98% 2.42% $ 24 $ 272
Select Growth Fund................... 1.44% 0.86% 2.30% $ 23 $ 260
Select Strategic Growth Fund*........ 1.44% 1.20% 2.64% $ 26 $ 294
Fidelity VIP Growth Portfolio........ 1.44% 0.68% 2.12% $ 21 $ 242
Select Growth and Income Fund........ 1.44% 0.73% 2.17% $ 22 $ 247
Fidelity VIP Equity-Income
Portfolio.......................... 1.44% 0.58% 2.02% $ 20 $ 231
Fidelity VIP High Income Portfolio... 1.44% 0.70% 2.14% $ 21 $ 244
Select Income Fund................... 1.44% 0.64% 2.08% $ 21 $ 238
Money Market Fund.................... 1.44% 0.32% 1.76% $ 18 $ 204
- ----------------------------------------------------------------------------------------------------
</TABLE>
* Fund expenses have been annualized for these Funds, which commenced operations
on February 20, 1998.
The charges reflect any applicable expense reimbursements and/or fee waivers.
For more detailed information, see the Fund Expense Table in the Prospectus.
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6. TAXES
Under current tax rules, your earnings are not taxed until you take them out.
Any withdrawals during the accumulation phase will be treated first as earnings
and are taxed as income. If you take money out before age 59 1/2, you may be
subject to a 10% federal tax penalty on the earnings. Payments during the
annuity payout phase are considered partly a return of your original investment
and partly earnings. The "original investment" part of each payment is not
taxable as income. However, if this contract is used as part of a qualified
retirement program (such as a 401(k) plan), then the entire income payment may
be taxable.
7. WITHDRAWALS
You can make withdrawals from your contract any time during the accumulation
phase. The minimum withdrawal amount is $100.
Amounts allocated to the Guarantee Period Account will be subject to a market
value adjustment, which may increase or decrease the value if withdrawn before
the end of the guarantee period.
8. PERFORMANCE
The value of your contract will vary up or down depending on the investment
performance of the Sub-Accounts investing in the underlying funds you choose.
The first chart below illustrates past returns on a calendar year for each
Sub-Account of Allmerica Financial Life Insurance and Annuity Company's
Allmerica Select Separate Account based on the inception dates of each of its
Sub-Accounts. The second chart illustrates the same information for each
Sub-Account of First Allmerica Financial Life Insurance Company's Allmerica
Select Separate Account. Each Company offers the same Sub-Accounts; however, the
Allmerica Select Separate Account of Allmerica Financial Life Insurance and
Annuity Company and its Sub-Accounts have been in existence for a longer period.
The performance figures reflect the contract fee, the insurance charges, and the
investment charges and other expenses of the underlying funds. They do not
reflect the optional Minimum Guaranteed Annuity Payout Rider or the optional
Enhanced Death Benefit Rider charges which, if elected, would reduce
performance. Past performance is not a guarantee of future results.
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ALLMERICA SELECT SEPARATE ACCOUNT OF ALLMERICA FINANCIAL LIFE INSURANCE AND
ANNUITY COMPANY
<TABLE>
<CAPTION>
CALENDAR YEAR
----------------------------------------------------------------------------
FUND 1998 1997 1996 1995 1994 1993
- ----------------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Select Emerging Markets Fund................... N/A N/A N/A N/A N/A N/A
Select International Equity Fund............... 14.62% 3.16% 20.20% 17.94% -4.30% N/A
T. Rowe Price International Stock Portfolio.... 14.00% 1.63% 12.99% 9.57% N/A N/A
Select Aggressive Growth Fund.................. 8.78% 17.03% 16.85% 30.44% -3.52% 17.82%
Select Capital Appreciation Fund............... 12.05% 12.66% 7.24% N/A N/A N/A
Select Value Opportunity Fund.................. N/A N/A N/A N/A N/A N/A
Select Growth Fund............................. 33.32% 32.18% 20.27% 22.83% -2.95% -0.32%
Select Strategic Growth Fund................... N/A N/A N/A N/A N/A N/A
Fidelity VIP Growth Portfolio.................. 37.31% 21.74% 13.06% 33.41% N/A N/A
Select Growth and Income Fund.................. 14.57% 20.79% 19.53% 28.50% -0.78% 8.81%
Fidelity VIP Equity-Income Portfolio........... 9.83% 26.30% 12.64% 33.15% N/A N/A
Fidelity VIP High Income Portfolio............. -5.90% 16.01% 12.40% 18.98% N/A N/A
Select Income Fund............................. 5.10% 7.62% 1.82% 15.31% -6.16% 9.35%
Money Market Fund.............................. 3.80% 3.97% 3.83% 4.33% 2.51% 1.55%
</TABLE>
ALLMERICA SELECT SEPARATE ACCOUNT OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE
COMPANY
<TABLE>
<CAPTION>
CALENDAR YEAR
--------------------------------------------------
FUND 1998 1997 1996 1995
- ---------------------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Select Emerging Markets Fund.......................................... N/A N/A N/A N/A
Select International Equity Fund...................................... 14.66% 3.16% 20.20% 17.94%
T. Rowe Price International Stock Portfolio........................... 14.04% 1.63% 12.99% 9.57%
Select Aggressive Growth Fund......................................... 8.82% 17.03% 16.85% 30.44%
Select Capital Appreciation Fund...................................... 12.14% 12.66% 7.24% N/A
Select Value Opportunity Fund......................................... N/A N/A N/A N/A
Select Growth Fund.................................................... 33.36% 32.18% 20.27% 22.83%
Select Strategic Growth Fund.......................................... N/A N/A N/A N/A
Fidelity VIP Growth Portfolio......................................... 37.35% 21.74% 13.06% 33.41%
Select Growth and Income Fund......................................... 14.61% 20.79% 19.53% 28.50%
Fidelity VIP Equity-Income Portfolio.................................. 9.87% 26.30% 12.64% 33.15%
Fidelity VIP High Income Portfolio.................................... -5.86% 16.01% 12.40% 18.98%
Select Income Fund.................................................... 5.14% 7.62% 1.82% 15.31%
Money Market Fund..................................................... 3.83% 3.97% 3.83% 4.33%
</TABLE>
9. DEATH BENEFIT
In addition to tax-deferred growth, your contract provides valuable insurance
features. If you or a joint owner (or an annuitant in the event that the owner
is a nonnatural person) dies during the accumulation phase, we will pay the
beneficiary a death benefit. The death benefit will be equal to the GREATER of:
(a) the accumulated value increased by any positive market value adjustment; or
(b) gross payments, decreased proportionately to reflect withdrawals. You may
also purchase a rider that will enhance the death benefit (see "Optional
Enhanced Death Benefit Rider" below).
10. ADDITIONAL FEATURES
OPTIONAL MINIMUM GUARANTEED ANNUITY PAYOUT RIDER (not available in all
jurisdictions): This optional rider is available for a separate monthly charge.
This rider guarantees you a minimum amount of fixed lifetime income during the
annuity payout phase, subject to certain conditions. On each contract
anniversary a minimum guaranteed annuity payout benefit base is determined. This
minimum guaranteed annuity payout
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benefit base (less any applicable premium taxes) is the value that will be
annuitized should you exercise the rider. In order to exercise the rider, a
fixed annuitization option involving a life contingency must be selected.
Annuitization under this rider will occur at the guaranteed annuity purchase
rates listed under the Annuity Option Tables in your Contract. The minimum
guaranteed annuity payout benefit base is equal to the greatest of:
(a) the accumulated value increased by any positive market value adjustment, if
applicable; or
(b) the accumulated value on the effective date of the rider compounded daily at
the annual rate of 5% plus gross payments made thereafter compounded daily
at the annual rate of 5%, starting on the date each payment is applied,
decreased proportionately to reflect withdrawals; or
(c) the highest accumulated value on any contract anniversary since the rider
effective date, as determined after positive adjustments have been made for
subsequent payments and any positive market value adjustment, if applicable,
and negative adjustments have been made for subsequent withdrawals.
OPTIONAL ENHANCED DEATH BENEFIT RIDER: This optional rider is available at
issue if you are under age 89 for a separate monthly charge. Under this rider:
I. If an owner (or an annuitant if the owner is a nonnatural person) dies before
the Annuity Date and before the oldest owner's 90th birthday, the death benefit
will be equal to the GREATEST of:
(a) the accumulated value increased by any positive market value adjustment, or
(b) gross payments compounded daily at the annual rate of 5%, starting on the
date each payment is applied, decreased proportionately to reflect
withdrawals (in Hawaii and New York, the 5% compounding is not available;
therefore, (b) equals gross payments decreased proportionately to reflect
withdrawals); or
(c) the highest accumulated value on any prior contract anniversary, increased
for any positive market value adjustment and subsequent payments and
decreased proportionately for subsequent withdrawals.
The (c) value is determined on each contract anniversary. A snapshot is taken of
the current (a) value and compared to snapshots taken of the (a) value on all
prior contract anniversaries, AFTER all of the (a) values have been adjusted to
reflect subsequent payments and decreased proportionately for subsequent
withdrawals. The highest of all of these adjusted (a) values then becomes the
(c) value. This (c) value becomes the floor below which the death benefit will
not drop and is locked-in until the next contract anniversary. The values of (b)
and (c) will be decreased proportionately if withdrawals are taken.
II. If an owner (or an annuitant if the owner is a nonnatural person) dies
before the Annuity Date but after the oldest owner's 90th birthday, the death
benefit will be equal to the GREATER of:
(a) the accumulated value increased by any positive market value adjustment; or
(b) the death benefit, as calculated under I, that would have been payable on
the contract anniversary immediately prior to the oldest owner's 90th
birthday, increased for subsequent payments and decreased proportionately
for subsequent withdrawals.
FREE LOOK PERIOD: If you cancel your contract within 10 days after receiving it
(or whatever period is required by your state), we will provide you with a
refund in accordance with the terms of the contract's "Right to Examine"
provision.
DOLLAR COST AVERAGING: You may elect to automatically transfer money on a
periodic basis from the Money Market Fund, Select Income Fund or Fixed Account
to one or more of the other investment options. There is no charge for this
service.
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AUTOMATIC ACCOUNT REBALANCING: You may elect to automatically have your
contract's accumulated value periodically reallocated ("rebalanced") among your
chosen investment options to maintain your designated percentage allocation mix.
There is no charge for this service.
11. INQUIRIES
If you need more information you may contact us at 1-800-366-1492 or send
correspondence to:
Allmerica Select
Allmerica Financial
P.O. Box 8179
Boston, Massachusetts 02266-8179
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ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
WORCESTER, MASSACHUSETTS
ALLMERICA SELECT SEPARATE ACCOUNT
This Prospectus provides important information about
the Allmerica Select Charter variable annuity
contracts issued by Allmerica Financial Life
Insurance and Annuity Company (in all jurisdictions
except Hawaii and New York) and First Allmerica
Financial Life Insurance Company in New York and
Hawaii. The contract is a flexible payment
tax-deferred combination variable and fixed annuity
PLEASE READ THIS offered on both a group and individual basis.
PROSPECTUS CAREFULLY
BEFORE INVESTING AND
KEEP IT FOR FUTURE
REFERENCE.
The Variable Account, known as the Allmerica Select
Separate Account is subdivided into Sub-Accounts.
Each Sub-Account offered under this contract invests
exclusively in shares of one of the following funds:
<TABLE>
<CAPTION>
FUND INVESTMENT ADVISER
-------------------------------------------------- --------------------------------------------------
<C> <S> <C>
ANNUITIES INVOLVE Select Emerging Markets Fund Schroder Capital Management International Inc.
RISKS INCLUDING Select International Equity Fund Bank of Ireland Asset Management (U.S.) Limited
POSSIBLE LOSS OF T. Rowe Price International Stock Portfolio Rowe Price-Fleming International, Inc.
PRINCIPAL. Select Aggressive Growth Fund Nicholas-Applegate Capital Management, L.P.
Select Capital Appreciation Fund T. Rowe Price Associates, Inc.
Select Value Opportunity Fund Cramer Rosenthal McGlynn, LLC
Select Growth Fund Putnam Investment Management, Inc.
Select Strategic Growth Fund Cambiar Investors, Inc.
Fidelity VIP Growth Fund Fidelity Management & Research Company
Select Growth and Income Fund J.P. Morgan Investment Management Inc.
Fidelity VIP Equity-Income Portfolio Fidelity Management & Research Company
Fidelity VIP High Income Portfolio Fidelity Management & Research Company
Select Income Fund Standish, Ayer & Wood, Inc.
Money Market Fund Allmerica Asset Management, Inc.
</TABLE>
THIS ANNUITY IS The Fixed Account is part of the Company's General
NOT: Account and pays an interest rate guaranteed for
- A BANK DEPOSIT OR one year from the time a payment is received. The
OBLIGATION; Guarantee Period Accounts offer fixed rates of
- FEDERALLY INSURED; interest for specified periods ranging from 3 to
- ENDORSED BY ANY 10 years. A Market Value Adjustment is applied to
BANK OR payments removed from a Guarantee Period Account
GOVERNMENTAL before the end of the specified period. The Market
AGENCY. Value Adjustment may be positive or negative.
Payments allocated to a Guarantee Period Account
are held in the Company's Separate Account GPA
(except in California where they are allocated to
the General Account).
A Statement of Additional Information dated May 1,
1999 containing more information about this
annuity is on file with the Securities and
Exchange Commission and is incorporated by
reference into this Prospectus. A copy may be
obtained free of charge by calling Allmerica
Select Customer Service at 1-800-366-1492. The
Table of Contents of the Statement of Additional
Information is listed on page 3 of this
Prospectus.
This Prospectus and the Statement of Additional
Information can also be obtained from the
Securities and Exchange Commission's website
(http://www.sec.gov).
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT
APPROVED OR DISAPPROVED THESE SECURITIES OR
DETERMINED THAT THE INFORMATION IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
DATED MAY 1, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
SPECIAL TERMS........................................................................... 4
SUMMARY OF FEES AND EXPENSES............................................................ 6
SUMMARY OF CONTRACT FEATURES............................................................ 10
PERFORMANCE INFORMATION................................................................. 17
DESCRIPTION OF THE COMPANIES, THE VARIABLE ACCOUNTS, THE TRUST,
FIDELITY VIP AND T. ROWE PRICE......................................................... 18
INVESTMENT OBJECTIVES AND POLICIES...................................................... 20
INVESTMENT ADVISORY SERVICES............................................................ 21
DESCRIPTION OF THE CONTRACT............................................................. 24
A. Payments......................................................................... 24
B. Right to Cancel Individual Retirement Annuity.................................... 25
C. Right to Cancel All Other Contracts.............................................. 25
D. Transfer Privilege............................................................... 25
Asset Allocation Model Reallocations............................................ 26
Automatic Transfers and Automatic Account Rebalancing Options................... 26
E. Surrender........................................................................ 27
F. Withdrawals...................................................................... 27
Systematic Withdrawals.......................................................... 28
Life Expectancy Distributions................................................... 28
G. Death Benefit.................................................................... 29
Death of an Owner Prior to the Annuity Date..................................... 29
Optional Enhanced Death Benefit Rider........................................... 29
Payment of the Death Benefit.................................................... 30
H. The Spouse of the Owner as Beneficiary........................................... 30
I. Assignment....................................................................... 30
J. Electing the Form of Annuity and the Annuity Date................................ 30
K. Description of Variable Annuity Payout Options................................... 31
L. Annuity Benefit Payments......................................................... 33
Determination of the First Variable Annuity Benefit Payment..................... 33
The Annuity Unit................................................................ 33
Determination of the Number of Annuity Units.................................... 33
Dollar Amount of Subsequent Variable Annuity Benefit Payments................... 33
M. Optional Minimum Guaranteed Annuity Payout Rider.................................. 34
N. NORRIS Decision.................................................................. 36
O. Computation of Values............................................................. 36
The Accumulation Unit........................................................... 36
Net Investment Factor........................................................... 37
CHARGES AND DEDUCTIONS.................................................................. 37
A. Variable Account Deductions...................................................... 37
Mortality and Expense Risk Charge............................................... 37
Administrative Expense Charge................................................... 38
Other Charges................................................................... 38
B. Contract Fee..................................................................... 38
C. Optional Benefit Rider Charges................................................... 38
D. Premium Taxes.................................................................... 39
E. Transfer Charge.................................................................. 39
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
GUARANTEE PERIOD ACCOUNTS............................................................... 39
FEDERAL TAX CONSIDERATIONS.............................................................. 41
A. Qualified and Non-Qualified Contracts............................................ 42
B. Taxation of the Contract in General.............................................. 42
Withdrawals Prior to Annuitization.............................................. 43
Annuity Payouts After Annuitization............................................. 43
Penalty on Distribution......................................................... 43
Assignments or Transfers........................................................ 43
Nonnatural Owners............................................................... 44
Deferred Compensation Plans of State and Local Government and Tax-Exempt
Organizations................................................................... 44
C. Tax Withholding.................................................................. 44
D. Provisions Applicable to Qualified Employer Plans................................ 44
Corporate and Self-Employed Pension and Profit Sharing Plans.................... 44
Individual Retirement Annuities................................................. 45
Tax-Sheltered Annuities......................................................... 45
Texas Optional Retirement Program............................................... 45
STATEMENTS AND REPORTS.................................................................. 45
LOANS (QUALIFIED CONTRACTS ONLY)........................................................ 46
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS....................................... 46
CHANGES TO COMPLY WITH LAW AND AMENDMENTS............................................... 47
VOTING RIGHTS........................................................................... 47
DISTRIBUTION............................................................................ 47
SERVICES................................................................................ 48
LEGAL MATTERS........................................................................... 48
YEAR 2000 COMPLIANCE.................................................................... 48
FURTHER INFORMATION..................................................................... 49
APPENDIX A -- MORE INFORMATION ABOUT THE FIXED ACCOUNT.................................. A-1
APPENDIX B -- PERFORMANCE TABLES (ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY
COMPANY)............................................................................... B-1
APPENDIX C -- PERFORMANCE TABLES (FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)..... C-1
APPENDIX D -- THE MARKET VALUE ADJUSTMENT............................................... D-1
APPENDIX E -- CONDENSED FINANCIAL INFORMATION........................................... E-1
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
GENERAL INFORMATION AND HISTORY......................................................... 2
TAXATION OF THE CONTRACT, THE VARIABLE ACCOUNT AND THE COMPANY.......................... 3
SERVICES................................................................................ 3
UNDERWRITERS............................................................................ 3
ANNUITY BENEFIT PAYMENTS................................................................ 4
PERFORMANCE INFORMATION................................................................. 6
FINANCIAL STATEMENTS.................................................................... F-1
</TABLE>
3
<PAGE>
SPECIAL TERMS
ACCUMULATED VALUE: the total value of all Accumulation Units in the Sub-Accounts
plus the value of all accumulations in the Fixed Account and Guarantee Period
Accounts credited to the Contract on any date before the Annuity Date.
ACCUMULATION UNIT: a unit of measure used to calculate the value of a
Sub-Account before annuity benefit payments begin.
ANNUITANT: the person designated in the Contract upon whose continuation of life
annuity benefit payments involving life contingency depend. Joint Annuitants are
permitted and, unless otherwise indicated, any reference to Annuitant shall
include Joint Annuitants.
ANNUITY DATE: the date on which annuity benefit payments begin. This date may
not be later than the first day of the month before the Owner's 99th birthday.
ANNUITY UNIT: a unit of measure used to calculate the value of the periodic
annuity benefit payments under the Contract.
COMPANY: unless otherwise specified, any reference to the "Company" shall refer
exclusively to Allmerica Financial Life Insurance and Annuity Company for
contracts issued in all jurisdictions except Hawaii and New York and exclusively
to First Allmerica Financial Life Insurance Company for contracts issued in
Hawaii and New York.
FIXED ACCOUNT: an investment option under the Contract that guarantees principal
and a fixed minimum interest rate and which is part of the Company's General
Account.
FIXED ANNUITY PAYOUT: an annuity payout option providing for annuity benefit
payments which remain fixed in amount throughout the annuity benefit payment
period selected.
GENERAL ACCOUNT: all the assets of the Company other than those held in a
separate account.
GUARANTEE PERIOD: the number of years that a Guaranteed Interest Rate is
credited to a Guarantee Period Account.
GUARANTEE PERIOD ACCOUNT: an account which corresponds to a Guaranteed Interest
Rate for a specified Guarantee Period.
GUARANTEED INTEREST RATE: the annual effective rate of interest, after daily
compounding, credited to a Guarantee Period Account.
MARKET VALUE ADJUSTMENT: a positive or negative adjustment to earnings in the
Guarantee Period Account assessed if any portion of a Guarantee Period Account
is withdrawn or transferred prior to the end of its Guarantee Period.
OWNER (OR YOU): the person, persons or entity entitled to exercise the rights
and privileges under this Contract. Joint Owners are permitted if one of the two
is an Annuitant and, unless otherwise indicated, any reference to Owner shall
include Joint Owners.
SUB-ACCOUNT: a subdivision of the Variable Account investing exclusively in the
shares of a corresponding fund of Allmerica Investment Trust, a corresponding
portfolio of the Variable Insurance Products Fund ("Fidelity VIP"), or the T.
Rowe Price International Stock Portfolio of T. Rowe Price International Series,
Inc. ("T. Rowe Price").
4
<PAGE>
SURRENDER VALUE: the Accumulated Value of the Contract on full surrender after
application of any Contract fee and Market Value Adjustment.
UNDERLYING FUNDS (OR FUNDS): Select Emerging Markets Fund and Select
International Equity Fund of Allmerica Investment Trust, T. Rowe Price
International Stock Portfolio of T. Rowe Price International Series, Inc.,
Select Aggressive Growth Fund, Select Capital Appreciation Fund, Select Value
Opportunity Fund, Select Growth Fund and Select Strategic Growth Fund of
Allmerica Investment Trust, Fidelity VIP Growth Portfolio of Variable Insurance
Products Fund, Select Growth and Income Fund of Allmerica Investment Trust,
Fidelity VIP Equity-Income Portfolio and Fidelity VIP High Income Portfolio of
Variable Insurance Products Fund, Select Income Fund, and Money Market Fund of
Allmerica Investment Trust.
VALUATION DATE: a day on which the net asset value of the shares of any of the
Underlying Funds is determined and unit values of the Sub-Accounts are
determined. Valuation Dates currently occur on each day on which the New York
Stock Exchange is open for trading, and on such other days (other than a day
during which no payment, withdrawal or surrender of a Contract was received)
when there is a sufficient degree of trading in an Underlying Fund's portfolio
securities such that the current unit value of the Sub-Accounts may be affected
materially.
VARIABLE ACCOUNT: Allmerica Select Separate Account, one of the Company's
separate accounts, consisting of assets segregated from other assets of the
Company. The investment performance of the assets of the Variable Account is
determined separately from the other assets of the Company and are not
chargeable with liabilities arising out of any other business which the Company
may conduct.
VARIABLE ANNUITY PAYOUT: an annuity payout option providing for payments varying
in amount in accordance with the investment experience of certain of the
Underlying Funds.
5
<PAGE>
SUMMARY OF FEES AND EXPENSES
There are certain fees and expenses that you will bear under the Allmerica
Select Charter Contract. The purpose of the following tables is to assist you in
understanding these fees and expenses. The tables show (1) charges under the
Contract, (2) annual expenses of the Sub-Accounts and (3) annual expenses of the
Funds. In addition to the charges and expenses described below, premium taxes
are applicable in some states and are deducted as described under "D. Premium
Taxes."
<TABLE>
<CAPTION>
(1) CONTRACT CHARGES: CHARGE
- -------------------------------------------------------- ------------
<S> <C> <C>
SALES CHARGE IMPOSED ON PAYMENTS: None
SURRENDER CHARGE: None
TRANSFER CHARGE: None
The Company currently makes no charge for processing
transfers and guarantees that the first 12 transfers
in a Contract year will not be subject to a transfer
charge. For each subsequent transfer, the Company
reserves the right to assess a charge, guaranteed
never to exceed $25, to reimburse the Company for the
costs of processing the transfer.
ANNUAL CONTRACT FEE: $35*
The fee is deducted annually and upon surrender prior
to the Annuity Date when Accumulated Value is less
than $75,000.
OPTIONAL RIDER CHARGES:
(The annual charge is deducted on a monthly basis at
the end of each month.)
On an annual basis as a percentage of Accumulated
Value, the charge is:
Optional Minimum Guaranteed Annuity Payout Rider 0.25%
with a ten-year waiting period:
Optional Minimum Guaranteed Annuity Payout Rider 0.15%
with a fifteen year waiting period:
Optional Enhanced Death Benefit Rider: 0.25%
<CAPTION>
(2) ANNUAL SUB-ACCOUNT EXPENSES:
- --------------------------------------------------------
<S> <C> <C>
(on an annual basis as percentage of average daily net
assets)
Mortality and Expense Risk Charge: 1.25%
Administrative Expense Charge: 0.15%
-----
Total Asset Charges: 1.40%
</TABLE>
* This fee may vary by state. See your Contract for more information.
6
<PAGE>
(3) ANNUAL FUND EXPENSES: The following table shows the expenses of the
Underlying Funds as a percentage of average net assets for the year ended
December 31, 1998.
<TABLE>
<CAPTION>
TOTAL FUND
MANAGEMENT FEE OTHER EXPENSES
(AFTER ANY VOLUNTARY EXPENSES (AFTER ANY (AFTER ANY WAIVERS/
FUND WAIVERS) REIMBURSEMENTS) REIMBURSEMENTS)
<S> <C> <C> <C>
Select Emerging Markets Fund(@).................. 1.00%(*) 1.19% 2.19%(1)(2)*
Select International Equity Fund................. 0.90% 0.12% 1.02%(1)(2)
T. Rowe Price International Stock Portfolio...... 1.05% 0.00% 1.05%
Select Aggressive Growth Fund.................... 0.88% 0.07% 0.95%(1)(2)
Select Capital Appreciation Fund................. 0.94% 0.10% 1.04%(1)(2)
Select Value Opportunity Fund.................... 0.90%(1)* 0.08% 0.98%(1)(2)*
Select Growth Fund............................... 0.81%(**) 0.05% 0.86%(1)(2)**
Select Strategic Growth Fund(@).................. 0.39%(*) 0.81% 1.20%(1)(2)*
Fidelity VIP Growth Portfolio.................... 0.59% 0.09% 0.68%(3)
Select Growth and Income Fund.................... 0.68% 0.05% 0.73%(1)(2)
Fidelity VIP Equity-Income Portfolio............. 0.49% 0.09% 0.58%(3)
Fidelity VIP High Income Portfolio............... 0.58% 0.12% 0.70%
Select Income Fund............................... 0.54% 0.10% 0.64%(1)
Money Market Fund................................ 0.26% 0.06% 0.32%(1)
</TABLE>
(@) Select Emerging Markets Fund and Select Strategic Growth Fund commenced
operations on February 20, 1998. Expenses shown are annualized.
(*) Amount has been adjusted to reflect a voluntary expense limitation currently
in effect for Select Emerging Markets Fund, Select Value Opportunity Fund, and
Select Strategic Growth Fund. Without these adjustments, the Management Fees and
Total Fund Expenses would have been 1.35% and 2.54%, respectively, for Select
Emerging Markets Fund, 0.91% and 0.99%, respectively, for Select Value
Opportunity Fund, and 0.85% and 1.66%, respectively, for the Select Strategic
Growth Fund.
(**) Effective June 1, 1998, the management fee rate for the Select Growth Fund
was revised. The Management Fee and Total Fund Expense ratios shown in the table
above have been adjusted to assume that the revised rates took effect January 1,
1998.
(1) Until further notice, Allmerica Financial Investment Management Services,
Inc. (the "Manager") has declared a voluntary expense limitation of 1.35% of
average net assets for Select Aggressive Growth Fund and Select Capital
Appreciation Fund, 1.25% for Select Value Opportunity Fund, 1.50% for Select
International Equity Fund, 1.20% for Select Growth Fund, 1.10% for Select Growth
and Income Fund, 1.00% Select Income Fund and 0.60% for Money Market Fund. The
total operating expenses of these Funds of the Trust were less than their
respective expense limitations throughout 1998.
Until further notice, the Manager has declared a voluntary expense limitation of
1.20% of average daily net assets for the Select Strategic Growth Fund. In
addition, the Manager has agreed to voluntarily waive its management fee to the
extent that expenses of the Select Emerging Markets Fund exceed 2.00% of the
Fund's average daily net assets, except that such waiver shall not exceed the
net amount of management fees earned by the Manager from the Fund after
subtracting fees paid by the Manager to a sub-advisor.
Until further notice, the Select Value Opportunity Fund's management fee rate
has been voluntarily limited to an annual rate of 0.90% of average daily net
assets, and total expenses are limited to 1.25% of average daily net assets.
The declaration of a voluntary management fee or expense limitation in any year
does not bind the Manager to declare future expense limitations with respect to
these Funds.
(2) These Funds have entered into agreements with brokers whereby brokers rebate
a portion of commissions. Had these amounts been treated as reductions of
expenses, the total annual fund operating expense ratios would have been 2.19%
for Select Emerging Markets Fund, 0.92% for Select Aggressive Growth Fund, 1.02%
7
<PAGE>
for Select Capital Appreciation Fund, 0.94% for Select Value Opportunity Fund,
1.01% for Select International Equity Fund, 0.84% for Select Growth Fund, 1.14%
for Select Strategic Growth Fund, and 0.70% for Select Growth and Income Fund.
(3) A portion of the brokerage commissions that certain funds paid was used to
reduce fund expenses. In addition, certain funds, or Fidelity Management &
Research Company on behalf of certain funds, have entered into arrangements with
their custodian whereby credits realized as a result of uninvested cash balances
were used to reduce custodian expenses. Including these reductions, total
operating expenses would have been 0.57% for the Fidelity VIP Equity-Income
Portfolio and 0.66% for the Fidelity VIP Growth Portfolio.
The Underlying Fund information above was provided by the Underlying Funds and
was not independently verified by the Company.
EXPENSE EXAMPLES: The following examples demonstrate the cumulative expenses
which an Owner would pay at 1-year, 3-year, 5-year and 10-year intervals under
certain contingencies. Each example assumes a $1,000 investment in a Sub-Account
and a 5% annual return on assets. As required by rules of the Securities and
Exchange Commission ("SEC"), the Contract fee is reflected in the examples by a
method designated to show the "average" impact on an investment in the Variable
Account. The total Contract fees collected are divided by the total average net
assets attributable to the Contracts. The resulting percentage is 0.04%, and the
amount of the Contract fee is assumed to be $0.40 in the examples. The Contract
fee is not deducted after annuitization.
THESE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
(1) At the end of the applicable time period, you would pay the following
expenses on a $1,000 investment, assuming a 5% annual return on assets and no
optional benefit riders:(1)
<TABLE>
<CAPTION>
1 3 5
FUND YEAR YEARS YEARS 10 YEARS
------------------------------ ---- ------ ------ --------
<S> <C> <C> <C> <C>
Select Emerging Markets
Fund......................... $36 $110 $187 $ 386
Select International Equity
Fund......................... $25 $ 76 $129 $ 276
T. Rowe Price International
Stock Portfolio.............. $25 $ 77 $131 $ 279
Select Aggressive Growth
Fund......................... $24 $ 74 $126 $ 269
Select Capital Appreciation
Fund......................... $25 $ 76 $130 $ 278
Select Value Opportunity
Fund......................... $24 $ 74 $127 $ 272
Select Growth Fund............ $23 $ 71 $121 $ 260
Select Strategic Growth
Fund......................... $26 $ 81 $138 $ 294
Fidelity VIP Growth
Portfolio.................... $21 $ 65 $112 $ 242
Select Growth and Income
Fund......................... $22 $ 67 $115 $ 247
Fidelity VIP Equity-Income
Portfolio.................... $20 $ 62 $107 $ 231
Fidelity VIP High Income
Portfolio.................... $21 $ 66 $113 $ 244
Select Income Fund............ $21 $ 64 $110 $ 238
Money Market Fund............. $18 $ 55 $ 94 $ 204
</TABLE>
8
<PAGE>
(2) At the end of the applicable time period, you would pay the following
expenses on a $1000 investment, assuming a 5% annual return on assets and
election of either an optional Enhanced Death Benefit Rider or an optional
Minimum Guaranteed Annuity Payout Rider(1) with a ten-year waiting period:
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Select Emerging Markets Fund................................................. $39 $118 $198 $408
Select International Equity Fund............................................. $27 $83 $142 $301
T. Rowe Price International Stock Portfolio.................................. $27 $84 $143 $304
Select Aggressive Growth Fund................................................ $26 $81 $138 $294
Select Capital Appreciation Fund............................................. $27 $84 $143 $303
Select Value Opportunity Fund................................................ $27 $82 $140 $297
Select Growth Fund........................................................... $26 $78 $134 $285
Select Strategic Growth Fund................................................. $29 $89 $151 $318
Fidelity VIP Growth Portfolio................................................ $24 $73 $125 $267
Select Growth and Income Fund................................................ $24 $74 $127 $272
Fidelity VIP Equity-Income Portfolio......................................... $23 $70 $120 $257
Fidelity VIP High Income Portfolio........................................... $24 $74 $126 $269
Select Income Fund........................................................... $23 $72 $123 $263
Money Market Fund............................................................ $20 $62 $107 $230
</TABLE>
(3) At the end of the applicable time period, you would pay the following
expenses on a $1,000 investment, assuming a 5% annual return on assets and
election of both an optional Enhanced Death Benefit Rider and an optional
Minimum Guaranteed Annuity Payout Rider(1) with a ten-year waiting period:
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Select Emerging Markets Fund................................................. $41 $125 $210 $430
Select International Equity Fund............................................. $30 $91 $154 $325
T. Rowe Price International Stock Portfolio.................................. $30 $92 $156 $328
Select Aggressive Growth Fund................................................ $29 $89 $151 $318
Select Capital Appreciation Fund............................................. $30 $91 $155 $327
Select Value Opportunity Fund................................................ $29 $89 $152 $321
Select Growth Fund........................................................... $28 $86 $146 $309
Select Strategic Growth Fund................................................. $31 $96 $163 $342
Fidelity VIP Growth Portfolio................................................ $26 $80 $137 $292
Select Growth and Income Fund................................................ $27 $82 $140 $297
Fidelity VIP Equity-Income Portfolio......................................... $25 $77 $132 $282
Fidelity VIP High Income Portfolio........................................... $26 $81 $138 $294
Select Income Fund........................................................... $26 $79 $135 $288
Money Market Fund............................................................ $23 $70 $119 $256
</TABLE>
(1) If the Minimum Guaranteed Annuity Payout Rider is exercised, you may only
annuitize under a fixed annuity payout option involving a life contingency at
the guaranteed annuity purchase rates listed under the Annuity Option Tables in
your Contract.
9
<PAGE>
SUMMARY OF CONTRACT FEATURES
WHAT IS THE ALLMERICA SELECT CHARTER VARIABLE ANNUITY?
The Allmerica Select Charter variable annuity contract ("Contract") is an
insurance contract designed to help you, the Owner, accumulate assets for your
retirement or other important financial goals on a tax-deferred basis. The
Contract combines the concept of professional money management with the
attributes of an annuity contract. Features available through the Contract
include: a customized investment portfolio; experienced professional investment
advisers; tax deferral on earnings; guarantees that can protect your family;
income payments that you can receive for life; issue age up to the 90th birthday
of the oldest person among the Owner(s) and the Annuitant(s).
The Contract has two phases, an accumulation phase and, if you choose to
annuitize, an annuity payout phase. During the accumulation phase, you may
allocate your initial payment and any additional payments you choose to make
among the combination of portfolios of securities ("Funds") under your Contract,
the Guarantee Period Accounts, and the Fixed Account. You select the investment
options most appropriate for your investment needs. As those needs change, you
may also change your allocation without incurring any tax consequences. Your
Contract's Accumulated Value is based on the investment performance of the Funds
and any accumulations in the Guarantee Period and Fixed Accounts. No income
taxes are paid on any earnings under the Contract unless you withdraw money. In
addition, during the accumulation phase, your beneficiaries receive certain
protections in the event of your death. See discussion below "WHAT HAPPENS UPON
MY DEATH DURING THE ACCUMULATION PHASE?"
WHAT HAPPENS IN THE ANNUITY PAYOUT PHASE?
During the annuity payout phase, you, or the payee you designate, can receive
income based on several annuity payout options. You choose the annuity payout
option and the date for annuity benefit payments to begin. You also decide
whether you want variable annuity benefit payments based on the investment
performance of certain Funds, fixed-amount annuity benefit payments with payment
amounts guaranteed by the Company, or a combination of fixed-amount and variable
annuity benefit payments. Among the payout options available during the annuity
payout phase are: periodic payments for the Annuitant's lifetime; periodic
payments for the Annuitant's life and the life of another person selected by
you; periodic payments for the Annuitant's lifetime with any remaining
guaranteed payments continuing for 10 years in the event that the Annuitant dies
before the end of ten years; periodic payments over a specified number of years
(1 to 30). Under this option you may reserve the right to convert remaining
payments to a lump-sum payout by electing a "commutable" option.
An optional Minimum Guaranteed Annuity Payout Rider is available during the
accumulation phase in most jurisdictions for a separate monthly charge. See "M.
Optional Minimum Guaranteed Annuity Payout Rider" under "DESCRIPTION OF THE
CONTRACT." If elected, the Rider guarantees the Owner a minimum amount of fixed
annuity lifetime income during the annuity payout phase, subject to certain
conditions. On each Contract anniversary a Minimum Guaranteed Annuity Payout
Benefit Base is determined. The Minimum Guaranteed Annuity Payout Benefit Base
(less any applicable premium taxes) is the value that will be annuitized should
you exercise the Rider. In order to exercise the Rider, a fixed annuitization
option involving a life contingency must be selected. Annuitization under this
Rider will occur at the guaranteed annuity purchase rates listed under the
Annuity Option Tables in your Contract. The Minimum Guaranteed Annuity Payout
Benefit Base is equal to the greatest of:
(a) the Accumulated Value increased by any positive Market Value Adjustment,
if applicable; or
(b) the Accumulated Value on the effective date of the Rider compounded
daily at the annual rate of 5% plus gross payments made thereafter
compounded daily at the annual rate of 5%, starting on the date each
payment is applied, decreased proportionately to reflect withdrawals; or
10
<PAGE>
(c) the highest Accumulated Value on any Contract anniversary since the
Rider effective date, as determined after positive adjustments have been
made for subsequent payments and any positive Market Value Adjustment, if
applicable, and negative adjustments have been made for subsequent
withdrawals.
For each withdrawal described in (b) and (c) above, the proportionate
reduction is calculated by multiplying the (b) or (c) value, whichever is
applicable, determined immediately prior to the withdrawal by the following
fraction:
amount of the withdrawal
Accumulated Value determined immediately prior to the withdrawal.
WHO ARE THE KEY PERSONS UNDER THE CONTRACT?
The Contract is between you, (the "Owner"), and us, Allmerica Financial Life
Insurance and Annuity Company (for contracts issued in all jurisdictions except
Hawaii and New York) or First Allmerica Financial Life Insurance Company (for
contracts issued in Hawaii and New York). Each Contract has an Owner (or an
Owner and a Joint Owner, in which case one of the two must be an Annuitant), an
Annuitant (or an Annuitant and a Joint Annuitant) and one or more beneficiaries.
As Owner, you make payments, choose investment allocations, receive annuity
benefit payments (or designate someone else to receive annuity benefit payments)
and select the Annuitant and beneficiary. When a Contract is owned jointly, the
consent of both Owners is required in order to exercise any ownership rights.
The Annuitant is the individual upon whose continuation of life annuity benefit
payments involving life contingency depend. An Annuitant may be changed at any
time after issue of the Contract and prior to the Annuity Date, unless (1) the
Owner is a nonnatural person or (2) you are taking life expectancy
distributions. For more information about life expectancy distributions, see "F.
Withdrawals." At all times there must be at least one Annuitant. If an Annuitant
dies and a replacement is not named, you will become the new Annuitant. The
beneficiary is the person, persons or entity entitled to the death benefit prior
to the Annuity Date and who, under certain circumstances, may be entitled to
annuity benefit payments upon the death of an Owner on or after the Annuity
Date.
HOW MUCH CAN I INVEST AND HOW OFTEN?
The number and frequency of your payments are flexible, subject only to a
$25,000 minimum for your initial payment and a $100 minimum for any additional
payments. In addition, a minimum of $1,000 is always required to establish a
Guarantee Period Account.
WHAT ARE MY INVESTMENT CHOICES?
You may allocate payments among the Sub-Accounts investing in the Funds, the
Guarantee Period Accounts, and the Fixed Account.
THE SUB-ACCOUNTS INVEST IN THE FOLLOWING FOURTEEN FUNDS:
- Select Emerging Markets Fund
Managed by Schroder Capital Management International Inc.
- Select International Equity Fund
Managed by Bank of Ireland Asset Management (U.S.) Limited
- T. Rowe Price International Stock Portfolio
Managed by Rowe Price-Fleming International, Inc.
11
<PAGE>
- Select Aggressive Growth Fund
Managed by Nicholas-Applegate Capital Management, L.P.
- Select Capital Appreciation Fund
Managed by T. Rowe Price Associates, Inc.
- Select Value Opportunity Fund
Managed by Cramer Rosenthal McGlynn, LLC
- Select Growth Fund
Managed by Putnam Investment Management, Inc.
- Select Strategic Growth Fund
Managed by Cambiar Investors, Inc.
- Fidelity VIP Growth Portfolio
Managed by Fidelity Management & Research Company
- Select Growth and Income Fund
Managed by J. P. Morgan Investment Management Inc.
- Fidelity VIP Equity-Income Portfolio
Managed by Fidelity Management & Research Company
- Fidelity VIP High Income Portfolio
Managed by Fidelity Management & Research Company
- Select Income Fund
Managed by Standish, Ayer & Wood, Inc.
- Money Market Fund
Managed by Allmerica Asset Management, Inc.
CERTAIN FUNDS MAY NOT BE AVAILABLE IN ALL STATES.
GUARANTEE PERIOD ACCOUNTS. Assets supporting the guarantees under the Guarantee
Period Accounts are held in the Company's Separate Account GPA, a non-unitized
insulated separate account, except in California where assets are held in the
Company's General Account. Values and benefits calculated on the basis of
Guarantee Period Account allocations, however, are obligations of the Company's
General Account. Amounts allocated to a Guarantee Period Account earn a
Guaranteed Interest Rate declared by the Company. The level of the Guaranteed
Interest Rate depends on the number of years of the Guarantee Period selected.
The Company may offer up to nine Guarantee Periods ranging from three to ten
years in duration. Once declared, the Guaranteed Interest Rate will not change
during the duration of the Guarantee Period. If amounts allocated to a Guarantee
Period Account are transferred, surrendered or applied to any annuity option at
any time other than the day following the last day of the applicable Guarantee
Period, a Market Value Adjustment will apply that may increase or decrease the
account's value; however, this adjustment will never be applied against your
principal. In addition, earnings in the GPA after application of the Market
Value Adjustment will not be less than an effective annual rate of 3%. For more
information about the Guarantee Period Accounts and the Market Value Adjustment,
see "GUARANTEE PERIOD ACCOUNTS."
THE GUARANTEE PERIOD ACCOUNTS MAY NOT BE AVAILABLE IN ALL STATES.
12
<PAGE>
FIXED ACCOUNT. The Fixed Account is part of the General Account, which consists
of all the Company's assets other than those allocated to the Variable Account
and any other separate account. Allocations to the Fixed Account are guaranteed
as to principal and a minimum rate of interest. Additional excess interest may
be declared periodically at the Company's discretion. The initial rate in effect
on the date an amount is allocated to the Fixed Account is guaranteed for one
year from that date. For more information about the Fixed Account, see APPENDIX
A, "MORE INFORMATION ABOUT THE FIXED ACCOUNT."
WHO ARE THE INVESTMENT ADVISERS OF THE FUNDS AND HOW ARE THEY SELECTED?
BARRA RogersCasey, Inc. ("BARRA RogersCasey"), a pension consulting firm,
assists the Company in the selection of the Contract's Funds. In addition, BARRA
RogersCasey assists the Trust in the selection of investment advisers for the
Funds of the Trust. BARRA RogersCasey provides consulting services to pension
plans representing hundreds of billions of dollars in total assets and, in its
consulting capacity, monitors the investment performance of over 1000 investment
advisers. BARRA RogersCasey is wholly-controlled by BARRA, Inc. As a consultant,
BARRA RogersCasey has no discretionary or decision-making authority with respect
to the Funds, and has no responsibility for any investment advice or other
services provided to the Funds by Allmerica Financial Investment Management
Services, Inc. ("Manager") or the investment advisers.
The Manager, an affiliate of the Company, is the investment manager of the
Trust. The Manager has entered into agreements with investment advisers
("Sub-Advisers") selected by the Manager and the Trustees in consultation with
BARRA RogersCasey. Each Sub-Adviser is selected by using strict objective,
quantitative, and qualitative criteria, with special emphasis on the
Sub-Adviser's record in managing similar portfolios. In consultation with BARRA
RogersCasey, a committee monitors and evaluates the ongoing performance of all
of the Funds. The committee may recommend the replacement of a Sub-Adviser of
one of the Funds of the Trust, or the addition or deletion of any other Funds.
The committee includes members who may be affiliated or unaffiliated with the
Company and the Trust. The Sub-Advisers (other than Allmerica Asset Management,
Inc.) are not affiliated with the Company or the Trust.
Fidelity Management & Research Company ("FMR") is the investment adviser of
Fidelity VIP. FMR is one of America's largest investment management
organizations and has its principal business address at 82 Devonshire Street,
Boston, MA. It is composed of a number of different companies, which provide a
variety of financial services and products. FMR is the original Fidelity
company, founded in 1946. It provides a number of mutual funds and other clients
with investment research and portfolio management services.
Rowe Price-Fleming International, Inc. ("Price-Fleming") is the investment
adviser of T. Rowe Price. Price-Fleming, founded in 1979 as a joint venture
between T. Rowe Price Associates, Inc. and Roger Fleming Holdings, Limited, is
one of the largest no-load international mutual fund asset managers with
approximately $32 billion (as of December 31, 1998) under management in its
offices in Baltimore, London, Tokyo, Hong Kong, Singapore and Buenos Aires.
13
<PAGE>
The following are the investment advisers of the Funds:
<TABLE>
<CAPTION>
Fund Investment Adviser
- -----------------------------------------------------------------------------------------
<S> <C>
SELECT EMERGING MARKETS FUND SCHRODER CAPITAL MANAGEMENT INTERNATIONAL INC.
SELECT INTERNATIONAL EQUITY FUND BANK OF IRELAND ASSET MANAGEMENT (U.S.) LIMITED
T. ROWE PRICE INTERNATIONAL STOCK ROWE PRICE-FLEMING INTERNATIONAL, INC.
PORTFOLIO
SELECT AGGRESSIVE GROWTH FUND NICHOLAS-APPLEGATE CAPITAL MANAGEMENT, L.P.
SELECT CAPITAL APPRECIATION FUND T. ROWE PRICE ASSOCIATES, INC.
SELECT VALUE OPPORTUNITY FUND CRAMER ROSENTHAL MCGLYNN, LLC
SELECT GROWTH FUND PUTNAM INVESTMENT MANAGEMENT, INC.
SELECT STRATEGIC GROWTH FUND CAMBIAR INVESTORS, INC.
FIDELITY VIP GROWTH PORTFOLIO FIDELITY MANAGEMENT & RESEARCH COMPANY
SELECT GROWTH AND INCOME FUND J. P. MORGAN INVESTMENT MANAGEMENT INC.
FIDELITY VIP EQUITY-INCOME PORTFOLIO FIDELITY MANAGEMENT & RESEARCH COMPANY
FIDELITY VIP HIGH INCOME PORTFOLIO FIDELITY MANAGEMENT & RESEARCH COMPANY
SELECT INCOME FUND STANDISH, AYER & WOOD, INC.
MONEY MARKET FUND ALLMERICA ASSET MANAGEMENT, INC.
</TABLE>
CAN I MAKE TRANSFERS AMONG THE SUB-ACCOUNTS?
Yes. Prior to the Annuity Date, you may transfer among the Sub-Accounts
investing in the Funds, the Guarantee Period Accounts, and the Fixed Account.
You will incur no current taxes on transfers while your money remains in the
Contract. See "D. Transfer Privilege." The first 12 transfers in a Contract year
are guaranteed to be free of a transfer charge. For each subsequent transfer in
a Contract year, the Company does not currently charge but reserves the right to
assess a processing charge guaranteed never to exceed $25. As of the date of
this Prospectus, transfers may be made to and among all of the available
Sub-Accounts. However, should additional Funds be added to the Contract, the
Company reserves the right to limit the number of Sub-Accounts which may be used
during the life of the Contract.
WHAT IF I NEED MY MONEY BEFORE THE ANNUITY PAYOUT PHASE BEGINS?
You may surrender your Contract or make withdrawals any time before the annuity
payout phase begins. A 10% federal tax penalty may apply on all amounts deemed
to be earnings if you are under age 59 1/2. (A Market Value Adjustment may apply
to any withdrawal made from a Guarantee Period Account prior to the expiration
of the Guarantee Period.)
WHAT HAPPENS UPON MY DEATH DURING THE ACCUMULATION PHASE?
If you or a Joint Owner (or an Annuitant in the event that the Owner is a
nonnatural person) should die before the Annuity Date, a death benefit will be
paid to the beneficiary.
The standard death benefit will be equal to the GREATER of: The Accumulated
Value increased by any positive Market Value Adjustment; or gross payments,
decreased proportionately to reflect withdrawals (for each withdrawal, the
proportionate reduction is calculated as the death benefit under this option
immediately prior to the withdrawal, multiplied by the withdrawal amount, and
divided by the Accumulated Value immediately prior to the withdrawal).
An optional Enhanced Death Benefit Rider is available if you are under age 89
for a separate monthly charge. See "G. Death Benefit" under "DESCRIPTION OF THE
CONTRACT." Under the Enhanced Death Benefit Rider:
I. If an Owner (or an Annuitant if the Owner is a nonnatural person) dies before
the Annuity Date and before the oldest Owner's 90th birthday, the death benefit
will be equal to the GREATEST of:
14
<PAGE>
(a) the Accumulated Value increased by any positive Market Value Adjustment; or
(b) gross payments compounded daily at the annual rate of 5%, starting on the
date each payment is applied, decreased proportionately to reflect
withdrawals (in Hawaii and New York the 5% compounding is not available;
therefore, (b) equals gross payments decreased proportionately to reflect
withdrawals); or
(c) the highest Accumulated Value on any prior Contract anniversary, increased
for any positive Market Value Adjustment and subsequent payments and
decreased proportionately for subsequent withdrawals.
The (c) value is determined on each Contract anniversary. A snapshot is taken of
the current (a) value and compared to snapshots taken of the (a) value on all
prior Contract anniversaries, after all of the (a) values have been adjusted to
reflect subsequent payments and decreased proportionately for subsequent
withdrawals. The highest of all of these adjusted (a) values then becomes the
(c) value. This (c) value becomes the floor below which the death benefit will
not drop and is locked-in until the next Contract anniversary. The values of (b)
and (c) will be decreased proportionately if withdrawals are taken.
II. If an Owner (or an Annuitant if the Owner is a nonnatural person) dies
before the Annuity Date but after the oldest Owner's 90th birthday, the death
benefit will be equal to the GREATER of:
(a) the Accumulated Value increased by any positive Market Value Adjustment; or
(b) the death benefit, as calculated under I, that would have been payable on
the Contract anniversary immediately prior to the oldest Owner's 90th
birthday, increased for subsequent payments and decreased proportionately
for subsequent withdrawals.
WHAT CHARGES WILL I INCUR UNDER MY CONTRACT?
If the Accumulated Value is less than $75,000 on each Contract anniversary or
upon surrender, the Company will deduct a $35 Contract fee from your Contract.
(This fee may vary by state. See your Contract for more information.)
A deduction for state and local premium taxes, if any, may be made as described
under "D. Premium Taxes."
The Company will deduct on a daily basis, an annual Mortality and Expense Risk
Charge and Administrative Expense Charge equal to 1.25% and 0.15%, respectively,
of the average daily net assets invested in each Fund. The Funds will incur
certain management fees and expenses which are described in "Other Charges" and
in the prospectuses of the Underlying Funds, which accompany this Prospectus.
Subject to state availability, optional benefit riders are available for an
additional charge equal to an annual rate of 0.25% for a Minimum Guaranteed
Annuity Payout Rider with a ten-year waiting period, 0.15% for a Minimum
Guaranteed Annuity Payout Rider with a fifteen-year waiting period and 0.25% for
an Enhanced Death Benefit Rider, which is deducted on the last day of each month
and on the date the Rider is terminated. For more information, see "G. Death
Benefit" and "M. Optional Minimum Guaranteed Annuity Payout Rider" under
"DESCRIPTION OF THE CONTRACT" and see "C. Optional Benefit Rider Charges" under
"CHARGES AND DEDUCTIONS."
CAN I EXAMINE THE CONTRACT?
Yes. Your Contract will be delivered to you after your purchase. If you return
the Contract to the Company within ten days of receipt, the Contract will be
cancelled. (There may be a longer period in certain states; see the "Right to
Examine" provision on the cover of your Contract.) If you cancel the Contract,
you will receive a refund of any amounts allocated to the Fixed and Guarantee
Period Accounts and the Accumulated Value of any amounts allocated to the
Sub-Accounts (plus any fees or charges that may have been deducted.) However, if
state law requires, or if the Contract was issued as an Individual Retirement
Annuity (IRA) you will generally receive a refund of your entire payment. In
certain states this refund may be the greater of (1) your
15
<PAGE>
entire payment or (2) the amounts allocated to the Fixed and the Guarantee
Period Accounts plus the Accumulated Value of amounts in the Sub-Accounts, plus
any fees or charges previously deducted. See "B. Right to Cancel Individual
Retirement Annuity" and "C. Right to Cancel All Other Contracts."
CAN I MAKE FUTURE CHANGES UNDER MY CONTRACT?
You can make several changes after receiving your Contract: You may assign your
ownership to someone else, except under certain qualified plans. You may change
an Annuitant at any time after Contract issue and prior to the Annuity Date,
unless the Owner is a nonnatural person and except while taking life expectancy
distributions. You may change the beneficiary, unless you have designated a
beneficiary irrevocably. You may change your allocation of payments. You may
make transfers among your accounts prior to the Annuity Date without any tax
consequences. You may cancel your Contract within ten days of delivery (or
longer if required by state law).
16
<PAGE>
PERFORMANCE INFORMATION
The Contract was first offered to the public in January 1999. The Company,
however, may advertise "total return" and "average annual total return"
performance information based on (1) the periods that the Sub-Accounts have been
in existence and (2) the periods that the Underlying Funds have been in
existence. Performance results in Tables 1A and 2A for all periods shown below
are calculated with all charges assumed to be those applicable to the Contract,
the Sub-Accounts and the Underlying Funds Both the total return and yield
figures are based on historical earnings and are not intended to indicate future
performance.
The total return of a Sub-Account refers to the total of the income generated by
an investment in the Sub-Account and of the changes in the value of the
principal (due to realized and unrealized capital gains or losses) for a
specified period, reduced by Variable Account charges, and expressed as a
percentage.
The average annual total return represents the average annual percentage change
in the value of an investment in the Sub-Account over a given period of time. It
represents averaged figures as opposed to the actual performance of a
Sub-Account, which will vary from year to year.
The yield of the Sub-Account investing in the Money Market Fund refers to the
income generated by an investment in the Sub-Account over a seven-day period
(which period will be specified in the advertisement). This income is then
"annualized" by assuming that the income generated in the specific week is
generated over a 52-week period. This annualized yield is shown as a percentage
of the investment. The "effective yield" calculation is similar but, when
annualized, the income earned by an investment in the Sub-Account is assumed to
be reinvested. Thus the effective yield will be slightly higher than the yield
because of the compounding effect of this assumed reinvestment.
The yield of a Sub-Account investing in a Fund other than the Money Market Fund
refers to the annualized income generated by an investment in the Sub-Account
over a specified 30-day or one-month period. The yield is calculated by assuming
that the income generated by the investment during that 30-day or one-month
period is generated each period over a 12-month period and is shown as a
percentage of the investment.
Quotations of average annual total return as shown in Tables 1A and 2A of
Appendix B and C are calculated in the manner prescribed by the SEC and show the
percentage rate of return of a hypothetical initial investment of $1,000 for the
most recent one, five and ten year period or for a period covering the time the
Sub-Account has been in existence, if less than the prescribed periods. The
calculation is adjusted to reflect the deduction of the annual Sub-Account asset
charge of 1.40%, the annual Contract fee and the Underlying Fund charges. The
calculation is not adjusted to reflect the deduction of the optional Minimum
Guaranteed Annuity Payout Rider charge or the optional Enhanced Death Benefit
Rider charge which, if elected, would reduce performance.
The performance shown in Table 2A of Appendix B and C are calculated in exactly
the same manner as those in Table 1A; however, the period of time is based on
the Underlying Fund's lifetime, which may predate the Sub-Accounts' inception
dates. These performance calculations are based on the assumption that the Sub-
Account corresponding to the applicable Underlying Fund was actually in
existence throughout the stated period and that the contractual charges and
expenses during that period were equal to those currently assessed under the
Contract.
Allmerica Financial Life Insurance and Annuity Company performance tables can be
found in Appendix B. First Allmerica Financial Life Insurance Company
performance tables can be found in Appendix C.
For more detailed information about these performance calculations, including
actual formulas, see the Statement of Additional Information.
PERFORMANCE INFORMATION FOR ANY SUB-ACCOUNT REFLECTS ONLY THE PERFORMANCE OF A
HYPOTHETICAL INVESTMENT IN THE SUB-ACCOUNT DURING THE TIME PERIOD ON WHICH THE
CALCULATIONS ARE BASED. PERFORMANCE
17
<PAGE>
INFORMATION SHOULD BE CONSIDERED IN LIGHT OF THE INVESTMENT OBJECTIVES AND
POLICIES AND RISK CHARACTERISTICS OF THE UNDERLYING FUND IN WHICH THE
SUB-ACCOUNT INVESTS AND THE MARKET CONDITIONS DURING THE GIVEN TIME PERIOD, AND
SHOULD NOT BE CONSIDERED AS A REPRESENTATION OF WHAT MAY BE ACHIEVED IN THE
FUTURE.
Performance information for a Sub-Account may be compared, in reports and
promotional literature, to: (1) the Standard & Poor's 500 Composite Stock Price
Index ("S&P 500"), Dow Jones Industrial Average ("DJIA"), Shearson Lehman
Aggregate Bond Index or other unmanaged indices so that investors may compare
the Sub-Account results with those of a group of unmanaged securities widely
regarded by investors as representative of the securities markets in general;
(2) other groups of variable annuity separate accounts or other investment
products tracked by Lipper, Inc., a widely used independent research firm which
ranks mutual funds and other investment products by overall performance,
investment objectives, and assets, or tracked by other services, companies,
publications, or persons, who rank such investment products on overall
performance or other criteria; or (3) the Consumer Price Index (a measure for
inflation) to assess the real rate of return from an investment in the
Sub-Account. Unmanaged indices may assume the reinvestment of dividends but
generally do not reflect deductions for administrative and management costs and
expenses. In addition, relevant broad-based indices and performance from
independent sources may be used to illustrate the performance of certain
Contract features.
At times, the Company may also advertise the ratings and other information
assigned to it by independent rating organizations such as A.M. Best Company
("A.M. Best"), Moody's Investors Service ("Moody's"), Standard & Poor's
Insurance Rating Services ("S&P") and Duff & Phelps. A.M. Best's and Moody's
ratings reflect their current opinion of the Company's relative financial
strength and operating performance in comparison to the norms of the life/health
insurance industry. S&P's and Duff & Phelps' ratings measure the ability of an
insurance company to meet its obligations under insurance policies it issues and
do not measure the ability of such companies to meet other non-policy
obligations. The ratings also do not relate to the performance of the Underlying
Funds.
DESCRIPTION OF THE COMPANIES, THE VARIABLE ACCOUNTS,
THE TRUST, FIDELITY VIP, AND T. ROWE PRICE
THE COMPANIES. Allmerica Financial Life Insurance and Annuity Company
("Allmerica Financial") is a life insurance company organized under the laws of
Delaware in July 1974. Its Principal Office is located at 440 Lincoln Street,
Worcester, MA 01653, telephone 508-855-1000. Allmerica Financial is subject to
the laws of the state of Delaware governing insurance companies and to
regulation by the Commissioner of Insurance of Delaware. In addition, Allmerica
Financial is subject to the insurance laws and regulations of other states and
jurisdictions in which it is licensed to operate. As of December 31, 1998,
Allmerica Financial had over $14 billion in assets and over $26 billion of life
insurance in force.
Effective October 1, 1995, Allmerica Financial changed its name from SMA Life
Assurance Company to Allmerica Financial Life Insurance and Annuity Company.
Allmerica Financial is an indirectly wholly owned subsidiary of First Allmerica
Financial Life Insurance Company which, in turn, is a wholly owned subsidiary of
Allmerica Financial Corporation ("AFC").
First Allmerica Financial Life Insurance Company ("First Allmerica") organized
under the laws of Massachusetts in 1844, is the fifth oldest life insurance
company in America. As of December 31, 1998, First Allmerica and its
subsidiaries had over $27 billion in combined assets and over $48 billion of
life insurance in force. Effective October 16, 1995, First Allmerica converted
from a mutual life insurance company known as State Mutual Life Assurance
Company of America to a stock life insurance company and adopted its present
name. First Allmerica is a wholly owned subsidiary of AFC. First Allmerica's
principal office ("Principal Office") is located at 440 Lincoln Street,
Worcester, MA 01653, telephone 508-855-1000.
18
<PAGE>
First Allmerica is subject to the laws of the Commonwealth of Massachusetts
governing insurance companies and to regulation by the Commissioner of Insurance
of Massachusetts. In addition, First Allmerica is subject to the insurance laws
and regulations of other states and jurisdictions in which it is licensed to
operate.
Both companies are charter members of the Insurance Marketplace Standards
Association ("IMSA"). Companies that belong to IMSA subscribe to a rigorous set
of standards that cover the various aspects of sales and service for
individually sold life insurance and annuities. IMSA members have adopted
policies and procedures that demonstrate a commitment to honesty, fairness and
integrity in all customer contacts involving sales and service of individual
life insurance and annuity products.
ALLMERICA SELECT SEPARATE ACCOUNT. Each Company maintains a separate account
called the Allmerica Select Separate Account (the "Variable Account"). The
Variable Account of Allmerica Financial was authorized by vote of the Board of
Directors of the Company on March 5, 1992 and the Variable Account of First
Allmerica was authorized by vote of the Board of Directors of the Company on
August 20, 1991. Each Variable Account meets the definition of a "separate
account" under federal securities laws and is registered with the SEC as a unit
investment trust under the Investment Company Act of 1940 ("the 1940 Act"). This
registration does not involve the supervision or management of investment
practices or policies of the Variable Accounts by the SEC.
The Allmerica Select Separate Account is a separate investment account of the
Company with fourteen Sub-Accounts. The assets used to fund the variable
portions of the Contract are set aside in Sub-Accounts kept separate from the
general assets of the Company. Each Sub-Account is administered and accounted
for as part of the general business of the Company. The income, capital gains or
capital losses of each Sub-Account, however, are allocated to each Sub-Account,
without regard to any other income, capital gains, or capital losses of the
Company. Obligations under the Contracts are obligations of the Company. Under
Delaware and Massachusetts law, the assets of the Variable Account may not be
charged with any liabilities arising out of any other business of the Company.
The Company reserves the right, subject to compliance with applicable law, to
change the names of the Separate Account and the Sub-Accounts. The Company also
offers other variable annuity contracts investing in the Variable Account which
are not discussed in this Prospectus. In addition, the Variable Account may
invest in other underlying funds which are not available to the contracts
described in this Prospectus.
ALLMERICA INVESTMENT TRUST. Allmerica Investment Trust (the "Trust") is an
open-end, diversified, management investment company registered with the SEC
under the 1940 Act. The Trust was established as a Massachusetts business trust
on October 11, 1984, for the purpose of providing a vehicle for the investment
of assets of various separate accounts established by the Company or other
affiliated insurance companies. Ten investment portfolios of the Trust currently
are available under the Contract, each issuing a series of shares: Select
Emerging Markets Fund, Select International Equity Fund, Select Aggressive
Growth Fund, Select Capital Appreciation Fund, Select Value Opportunity Fund,
Select Growth Fund, Select Strategic Growth Fund, Select Growth and Income Fund,
Select Income Fund and the Money Market Fund. The assets of each Fund are held
separate from the assets of the other Funds. Each Fund operates as a separate
investment vehicle and the income or losses of one Fund have no effect on the
investment performance of another Fund. Shares of the Trust are not offered to
the general public but solely to such variable accounts.
Allmerica Financial Investment Management Services, Inc. ("Manager") serves as
the investment adviser of the Trust and has entered into sub-advisory agreements
with other investment managers ("Sub-Advisers") who manage the investments of
the Funds. See "Investment Advisory Services to the Trust."
VARIABLE INSURANCE PRODUCTS FUND. Variable Insurance Products Fund ("Fidelity
VIP"), managed by Fidelity Management & Research, Inc., is an open-end,
diversified, management investment company organized as a Massachusetts business
trust on November 13, 1981 and registered with the SEC under the 1940 Act.
19
<PAGE>
Three of its investment portfolios are available under the Contract: Fidelity
VIP High Income Portfolio, Fidelity VIP Equity-Income Portfolio, and Fidelity
VIP Growth Portfolio.
Various Fidelity companies perform certain activities required to operate
Fidelity VIP. Fidelity Management & Research, Inc. ("FMR") is one of America's
largest investment management organizations, and has its principal business
address at 82 Devonshire Street, Boston, Massachusetts. It is composed of a
number of different companies which provide a variety of financial services and
products. FMR is the original Fidelity company, founded in 1946. It provides a
number of mutual funds and other clients with investment research and portfolio
management services. The Portfolios of Fidelity VIP as part of their operating
expenses pay an investment management fee to FMR. See "Investment Advisory
Services to Fidelity VIP."
T. ROWE PRICE INTERNATIONAL SERIES, INC. T. Rowe Price International Series,
Inc. ("T. Rowe Price"), managed by Rowe Price-Fleming International, Inc.
("Price-Fleming"), is an open-end, diversified, management investment company
organized as a Maryland corporation in 1994 and registered with the SEC under
the 1940 Act. One of its investment portfolios is available under the Contract:
the T. Rowe Price International Stock Portfolio. See "Investment Advisory
Services to T. Rowe Price." One of its affiliates, T. Rowe Price Associates,
Inc., serves as the Sub-Adviser to the Select Capital Appreciation Fund.
INVESTMENT OBJECTIVES AND POLICIES
A summary of investment objectives of each of the Funds is set forth below. MORE
DETAILED INFORMATION REGARDING THE INVESTMENT OBJECTIVES, RESTRICTIONS AND
RISKS, EXPENSES PAID BY THE FUNDS, AND OTHER RELEVANT INFORMATION REGARDING THE
FUNDS MAY BE FOUND IN THE PROSPECTUSES OF THE TRUST, FIDELITY VIP AND T. ROWE
PRICE, WHICH ACCOMPANY THIS PROSPECTUS, AND SHOULD BE READ CAREFULLY BEFORE
INVESTING. Also, the Statements of Additional Information of the Funds are
available upon request. There can be no assurance that the investment objectives
of the Funds can be achieved or that the value of the Contract will equal or
exceed the aggregate amount of the purchase payments made under the Contract.
SELECT EMERGING MARKETS FUND -- seeks long-term growth of capital by investing
in the world's emerging markets. The Sub-Adviser for the Select Emerging Markets
Fund is Schroder Capital Management International Inc.
SELECT INTERNATIONAL EQUITY FUND -- seeks maximum long-term total return
(capital appreciation and income). The Fund will invest primarily in common
stocks of established non-U.S. companies. The Sub-Adviser for the Select
International Equity Fund is Bank of Ireland Asset Management (U.S.) Limited.
T. ROWE PRICE INTERNATIONAL STOCK PORTFOLIO -- seeks long-term growth of capital
through investments primarily in common stocks of established, non-U.S.
companies. The manager of the Portfolio is Rowe Price-Fleming International,
Inc.
SELECT AGGRESSIVE GROWTH FUND -- seeks above-average capital appreciation by
investing primarily in common stocks of companies which are believed to have
significant potential for capital appreciation. The Sub-Adviser for the Select
Aggressive Growth Fund is Nicholas-Applegate Capital Management, L.P.
SELECT CAPITAL APPRECIATION FUND -- seeks long-term growth of capital.
Realization of income is not a significant investment consideration, and any
income realized on the Fund's investments will be incidental to its primary
objective. The Fund will invest primarily in common stock of industries and
companies which are experiencing favorable demand for their products and
services, and which operate in a favorable competitive environment and
regulatory climate. The Sub-Adviser for the Select Capital Appreciation Fund is
T. Rowe Price Associates, Inc.
SELECT VALUE OPPORTUNITY FUND -- seeks long-term growth of capital by investing
principally in diversified portfolio of common stocks of small and mid-size
companies whose securities at the time of purchase are
20
<PAGE>
considered by the Sub-Adviser to be undervalued. The Sub-Adviser for the Select
Value Opportunity Fund is Cramer Rosenthal McGlynn, LLC.
SELECT GROWTH FUND -- seeks to achieve growth of capital by investing in a
diversified portfolio consisting primarily of common stocks selected on the
basis of their long-term growth potential. The Sub-Adviser for the Select Growth
Fund is Putnam Investment Management, Inc.
SELECT STRATEGIC GROWTH FUND -- seeks long-term growth of capital by investing
primarily in common stocks of established companies. The Sub-Adviser for the
Select Strategic Growth Fund is Cambiar Investors, Inc.
FIDELITY VIP GROWTH PORTFOLIO -- seeks to achieve capital appreciation. The
Portfolio normally purchases common stocks, although its investments are not
restricted to any one type of security. Capital appreciation also may be found
in other types of securities, including bonds and preferred stocks.
SELECT GROWTH AND INCOME FUND -- seeks a combination of long-term growth of
capital and current income. The Fund will invest primarily in dividend-paying
common stocks and securities convertible into common stocks. The Sub-Adviser for
the Select Growth and Income Fund is J. P. Morgan Investment Management Inc.
FIDELITY VIP EQUITY-INCOME PORTFOLIO -- seeks reasonable income by investing
primarily in income-producing equity securities. In choosing these securities,
the Portfolio also will consider the potential for capital appreciation. The
Portfolio's goal is to achieve a yield which exceeds the composite yield on the
securities comprising the S&P 500.
FIDELITY VIP HIGH INCOME PORTFOLIO -- seeks to obtain a high level of current
income by investing primarily in high-yielding, lower-rated fixed-income
securities (commonly referred to as "junk bonds"), while also considering growth
of capital. These securities are often considered to be speculative and involve
greater risk of default or price changes than securities assigned a high quality
rating. For more information about these lower-rated securities, see the
Fidelity VIP prospectus.
SELECT INCOME FUND -- seeks a high level of current income. The Fund will invest
primarily in investment-grade, fixed-income securities. The Sub-Adviser for the
Select Income Fund is Standish, Ayer & Wood, Inc. Money Market Fund seeks to
obtain maximum current income consistent with the preservation of capital and
liquidity. Allmerica Asset Management, Inc. is the Sub-Adviser of the Money
Market Fund.
If there is a material change in the investment policy of a Fund, the Owner will
be notified of the change. If the Owner has Accumulated Value allocated to that
Fund, he or she may have the Accumulated Value reallocated without charge to
another Fund or to the Fixed Account, where available, on written request
received by the Company within sixty (60) days of the later of (1) the effective
date of such change in the investment policy, or (2) the receipt of the notice
of the Owner's right to transfer.
INVESTMENT ADVISORY SERVICES
INVESTMENT ADVISORY SERVICES TO THE TRUST. The overall responsibility for the
supervision of the affairs of the Trust rests with the trustees. The Trust has
entered into an agreement ("Management Agreement") with Allmerica Financial
Investment Management Services, Inc. ("Manager"), an indirectly wholly owned
subsidiary of First Allmerica, to handle the day-to-day affairs of the Trust.
The Manager, subject to review by the trustees, is responsible for the general
management of the Funds of the Trust. The Manager also performs certain
administrative and management services for the Trust, furnishes to the Trust all
necessary office space, facilities and equipment, and pays the compensation, if
any, of officers and trustees affiliated with the Manager.
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<PAGE>
Other than the expenses specifically assumed by the Manager under the Management
Agreement, all expenses incurred in the operation of the Trust are borne by it,
including fees and expenses associated with the registration and qualification
of the Trust's shares under the Securities Act of 1933 ("the 1933 Act"), other
fees payable to the SEC, independent public accountant, legal and custodian
fees, association membership dues, taxes, interest, insurance premiums,
brokerage commission, fees and expenses of the trustees who are not affiliated
with the Manager, expenses for proxies, prospectuses, reports to shareholders
and other expenses.
For providing its services under the Management Agreement, the Manager will
receive a fee, computed daily at an annual rate based on the average daily net
asset value of each Fund of the Trust as follows:
<TABLE>
<CAPTION>
FUND NET ASSET VALUE RATE
- --------------------------------------- ---------------------------------------------- ---------
<S> <C> <C>
Select Emerging Markets Fund * 1.35%
Select International Equity Fund First $100 million 1.00%
Next $150 million 0.90%
Over $250 million 0.85%
Select Aggressive Growth Fund First $100 million 1.00%
Next $150 million 0.90%
Over $250 million 0.85%
Select Capital Appreciation Fund First $100 million 1.00%
Next $150 million 0.90%
Over $250 million 0.85%
Select Value Opportunity Fund First $100 million 1.00%
Next $150 million 0.85%
Next $250 million 0.80%
Next $250 million 0.75%
Over $750 million 0.70%
Select Growth Fund First $250 million 0.85%
Next $250 million 0.80%
Next $250 million 0.75%
Over $750 million 0.70%
Select Strategic Growth Fund * 0.85%
Select Growth and Income Fund First $100 million 0.75%
Next $150 million 0.70%
Over $250 million 0.65%
Select Income Fund First $50 million 0.60%
Next $50 million 0.55%
Over $100 million 0.45%
Money Market Fund First $50 million 0.35%
Next $200 million 0.25%
Over $250 million 0.20%
</TABLE>
* For the Select Emerging Markets Fund and Select Strategic Growth Fund, the
rate applicable to the Manager does not vary according to the level of assets in
the Fund.
Under the Management Agreement with the Trust, the Manager has entered into
agreements with investment advisers ("Sub-Advisers") selected by the Manager and
Trustees in consultation with BARRA RogersCasey, Inc. ("BARRA RogersCasey"), a
pension consulting firm. The cost of such consultation services is borne by the
Manager. BARRA RogersCasey provides consulting services to pension plans
representing hundreds of billions of dollars in total assets and, in its
consulting capacity, monitors the investment performance of over 1000 investment
advisers. BARRA RogersCasey is wholly-controlled by
22
<PAGE>
BARRA, Inc. As a consultant, BARRA RogersCasey has no discretionary or
decision-making authority with respect to the Funds, and has no responsibility
for any investment advice or other services provided to the Funds by the Manager
or the Sub-Advisers.
Each independent Sub-Adviser is selected by using strict objective,
quantitative, and qualitative criteria, with special emphasis on the
Sub-Adviser's record in managing similar portfolios. In consultation with BARRA
RogersCasey, a committee monitors and evaluates the ongoing performance of all
of the Funds. The committee may recommend the replacement of a Sub-Adviser of
one of the Funds of the Trust, or the addition or deletion of any other Funds.
The committee includes members who may be affiliated or unaffiliated with the
Company and the Trust. The Sub-Advisers (other than Allmerica Asset Management,
Inc.) are not affiliated with the Company or the Trust.
The prospectus of the Trust contains additional information concerning the
Funds, including information about additional expenses paid by the Funds, and
should be read in conjunction with the Prospectus.
INVESTMENT ADVISORY SERVICES TO FIDELITY VIP. For managing investments and
business affairs, each Portfolio pays a monthly management fee to Fidelity
Management & Research Company ("FMR"). The prospectus of Fidelity VIP contains
additional information about the Portfolios, including information about
additional expenses paid by the Portfolios, and should be read in conjunction
with this Prospectus.
The fee for each fund is calculated by adding a group fee rate to an individual
fund fee rate, multiplying the result by the fund's monthly average net assets,
and dividing by twelve.
The Fidelity VIP High Income Portfolio's annual fee rate is made up of the sum
of two components:
1. A group fee rate based on the average net assets of all the mutual funds
advised by FMR. On an annual basis, this rate cannot rise above 0.37%, and
will drop as the total assets under management increase.
2. An individual fund fee rate of 0.45% for the Fidelity VIP High Income
Portfolio.
Both Fidelity VIP Growth and Fidelity VIP Equity-Income Portfolios' annual fee
rates are made up of two components:
1. A group fee rate based on the average net assets of all the mutual funds
advised by FMR. On an annual basis, this rate cannot rise above 0.52%, and
will drop as the total assets under management increase.
2. An individual fund fee rate of 0.30% for the Fidelity VIP Growth Portfolio
and 0.20% for the Fidelity VIP Equity-Income Portfolio.
Thus, the Fidelity VIP High Income Portfolio may have a fee as high as 0.82% of
its average net assets. The Fidelity VIP Growth Portfolio may have a fee of as
high as 0.82% of its average net assets. The Fidelity VIP Equity-Income
Portfolio may have a fee as high as 0.72% of its average net assets.
INVESTMENT ADVISORY SERVICES TO T. ROWE PRICE. To cover investment management
and operating expenses, the T. Rowe Price International Stock Portfolio pays
Rowe Price-Fleming International, Inc. a single, all-inclusive fee of 1.05% of
its average daily net assets.
23
<PAGE>
DESCRIPTION OF THE CONTRACT
A. PAYMENTS.
The Company issues a contract when its underwriting requirements, which include
receipt of the initial payment and allocation instructions by the Company at its
Principal Office, are met. These requirements also may include the proper
completion of an application; however, where permitted, the Company may issue a
Contract without completion of an application and/or signature for certain
classes of Contracts.
Payments are to be made payable to the Company. A net payment is equal to the
payment received less the amount of any applicable premium tax. The initial net
payment will be credited to the Contract and allocated among the requested
accounts as of the date that all issue requirements are properly met. If all
issue requirements are not completed within five business days of the Company's
receipt of the initial payment, the payment will be returned immediately unless
the Owner specifically consents to the holding of it pending completion of the
outstanding issue requirements. Subsequent payments will be credited as of the
Valuation Date received at the Principal Office on the basis of accumulation
unit value next determined after receipt.
Payments may be made to the Contract at any time prior to the Annuity Date,
subject to certain minimums. Currently, the initial payment must be at least
$25,000. Each subsequent payment must be at least $100. The minimum allocation
to a Guarantee Period Account is $1,000. If the Owner requests an allocation of
less than $1,000 to a Guarantee Period Account, the Company reserves the right
to apply that amount to the Money Market Fund of the Trust.
From time to time, where permitted by law, the Company may credit amounts to
Contracts when Contracts are sold to individuals or groups of individuals in a
manner that reduces sales expenses. The Company will consider factors such as
the following: (1) the size and type of group or class, and the persistency
expected from that group or class; (2) the total amount of payments to be
received, and the manner in which payments are remitted; (3) the purpose for
which the Contracts are being purchased, and whether that purpose makes it
likely that costs and expenses will be reduced; (4) other transactions where
sales expenses are likely to be reduced; or (5) the level of commissions paid to
selling broker-dealers or certain financial institutions with respect to
Contracts within the same group or class (for example, broker-dealers who offer
this Contract in connection with financial planning services offered on a fee
for service basis). The Company may also credit amounts to Contracts, where
either the Owner or the Annuitant on the issue date is within the following
class of individuals ("eligible persons"): employees and registered
representatives of any broker-dealer which has entered into a sales agreement
with the Company to sell the Contract; employees of the Company, its affiliates
and subsidiaries; officers, directors, trustees and employees of any of the
Underlying Funds, investment managers or sub-advisers; and the spouses of and
immediate family members residing in the same household with such eligible
persons. "Immediate family members" means children, siblings, parents and
grandparents.
Generally, unless otherwise requested, all payments will be allocated among the
accounts in the same proportion that the initial net payment is allocated or, if
subsequently changed, according to the most recent allocation instructions. As
of the date of this Prospectus, payments to the Contract may be allocated among
all of the current Sub-Accounts during the life of the Contract and prior to the
Annuity Date. However, should additional Funds be added to the Contract, the
Company reserves the right to limit the number of Sub-Accounts among which
payments may be allocated. The Owner may change allocation instructions for new
payments pursuant to a written or telephone request. If telephone requests are
elected by the Owner, a properly completed authorization must be on file before
telephone requests will be honored. The policy of the Company and its agents and
affiliates is that they will not be responsible for losses resulting from acting
upon telephone requests reasonably believed to be genuine. The Company will
employ reasonable procedures to confirm that instructions communicated by
telephone are genuine; otherwise, the Company may be liable for any losses due
to unauthorized or fraudulent instructions. The procedures the Company follows
for transactions initiated by telephone may include requirements that callers on
behalf of an Owner identify themselves
24
<PAGE>
by name and identify the Annuitant by name, date of birth and social security
number or PIN number. All transfer instructions by telephone are tape-recorded.
B. RIGHT TO CANCEL INDIVIDUAL RETIREMENT ANNUITY.
An individual purchasing a Contract intended to qualify as an IRA may cancel the
Contract at any time within ten days after receipt of the Contract and receive a
refund. In order to cancel the Contract, the Owner must mail or deliver the
Contract to the agent through whom the Contract was purchased, to the Principal
Office of the Company at 440 Lincoln Street, Worcester, MA 01653, or to an
authorized representative. Mailing or delivery must occur within ten days after
receipt of the Contract for cancellation to be effective.
Within seven days the Company will provide a refund equal to the gross
payment(s) received. In some states, however, the refund may equal the greater
of (a) gross payments or (b) any amounts allocated to the Fixed and the
Guarantee Period Accounts plus the Accumulated Value of amounts allocated to the
Variable Account plus any amounts deducted under the Contract or by the Funds
for taxes, charges or fees. At the time the Contract is issued, the "Right to
Examine" provision on the cover of the Contract will specifically indicate
whether the refund will be equal to gross payments or equal to the greater of
(a) or (b) as set forth above.
The liability of the Variable Account under this provision is limited to the
Owner's Accumulated Value in the Sub-Accounts on the date of cancellation. Any
additional amounts refunded to the Owner will be paid by the Company.
C. RIGHT TO CANCEL ALL OTHER CONTRACTS.
An Owner may cancel the Contract at any time within ten days after receipt of
the Contract (or longer if required by state law) and receive a refund. In most
states, the Company will pay the Owner an amount equal to the sum of (1) the
difference between the amount paid, including fees, and any amount allocated to
the Variable Account, and (2) the Accumulated Value of amounts allocated to the
Variable Account as of the date the request is received. If the Contract was
purchased as an IRA or issued in a state that requires a full refund of the
initial payments(s), the IRA cancellation right described above will be used. At
the time the Contract is issued, the "Right to Examine" provision on the cover
of the Contract will specifically indicate what the refund will be and the time
period allowed to exercise the right to cancel.
In order to comply with New York regulations concerning the purchase of a new
annuity contract to replace an existing life or annuity contract (a
"replacement"), an Owner who purchases the Contract in New York as a replacement
may cancel within 60 days after receipt. In order to cancel the Contract, the
Owner must mail or deliver it to the Company's Principal Office or to one of its
authorized representatives. The Company will refund an amount equal to the
Surrender Value plus all fees and charges and the Contract will be void from the
beginning.
D. TRANSFER PRIVILEGE.
At any time prior to the Annuity Date, the Owner may transfer amounts among
accounts at any time upon written or telephone request to the Company. As of the
date of this Prospectus, transfers may be made to and among all of the available
Sub-Accounts. However, should additional Funds be added to the Contract, the
Company reserves the right to limit the number of Sub-Accounts which may be used
during the life of the Contract. As discussed in "A. Payments," a properly
completed authorization form must be on file before telephone requests will be
honored. Transfer values will be based on the Accumulated Value next computed
after receipt of the transfer request.
Transfers to a Guarantee Period Account must be at least $1,000. If the amount
to be transferred to a Guarantee Period Account is less than $1,000, the Company
may transfer that amount to the Money Market
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<PAGE>
Fund. Transfers from a Guarantee Period Account prior to the expiration of the
Guarantee Period will be subject to a Market Value Adjustment.
The first 12 transfers in a Contract year are guaranteed to be free of any
transfer charge. The Company does not currently charge for additional transfers
but reserves the right to assess a charge, guaranteed never to exceed $25, to
reimburse it for the expense of processing these additional transfers.
The Company also reserves the right to restrict transfer privileges when
exercised by a market timing firm or any other third party authorized to
initiate allocations, transfers or exchanges on behalf of multiple Contract
owners, if the execution of such transactions may disadvantage or potentially
impair the Contract rights of other Contract owners. The Company may, among
other things, not accept (1) the transfer or exchange instructions of any agent
acting under a power of attorney on behalf of more than one Contract owner, or
(2) the transfer or exchange instructions of individual Contract owners who have
executed pre-authorized transfer or exchange forms which are submitted by market
timing firms or other third parties on behalf of more than one Contract owner at
the same time.
ASSET ALLOCATION MODEL REALLOCATIONS. If an Owner elects to follow an asset
allocation strategy, the Owner may preauthorize transfers in accordance with the
chosen strategy. The Company may provide administrative or other support
services to independent third parties who provide recommendations as to such
allocation strategies. However, the Company does not engage any third parties to
offer investment allocation services of any type under this Contract, does not
endorse or review any investment allocation recommendations made by such third
parties and is not responsible for the investment allocations and transfers
transacted on the Owner's behalf. The Company does not charge for providing
additional asset allocation support services. Additional information concerning
asset allocation programs for which the Company is currently providing support
services may be obtained from a registered representative or the Company.
AUTOMATIC TRANSFERS (DOLLAR COST AVERAGING) AND AUTOMATIC ACCOUNT REBALANCING
OPTIONS. The Owner may elect automatic transfers of a predetermined dollar
amount, not less than $100, on a periodic basis (monthly, bi-monthly, quarterly,
semi-annually or annually) from the Money Market Fund, the Select Income Fund or
the Fixed Account (the source account) to one or more Funds. Automatic transfers
may not be made into the Fixed Account, the Guarantee Period Accounts or, if
applicable, the Fund being used as the source account. If an automatic transfer
would reduce the balance in the source account to less than $100, the entire
balance will be transferred proportionately to the chosen Funds. Automatic
transfers will continue until the amount in the source account on a transfer
date is zero or the Owner's request to terminate the option is received by the
Company. If additional amounts are allocated to the source account after its
balance has fallen to zero, this option will not restart automatically and the
Owner must provide a new request to the Company.
To the extent permitted by state law, the Company reserves the right, from time
to time, to credit an enhanced interest rate to certain initial and/or
subsequent payments deposited into the Fixed Account and utilizing the Fixed
Account as the source account from which to process automatic transfers. For
more information see APPENDIX A, "MORE INFORMATION ABOUT THE FIXED ACCOUNT."
The Owner may request automatic rebalancing of Sub-Account allocations on a
monthly, quarterly, semi-annual or annual basis in accordance with percentage
allocations specified by the Owner. As frequently as specified by the Owner, the
Company will review the percentage allocations in the Funds and, if necessary,
transfer amounts to ensure conformity with the designated percentage allocation
mix. If the amount necessary to re-establish the mix on any scheduled date is
less than $100, no transfer will be made. Automatic Account Rebalancing will
continue until the Owner's request to terminate or change the option is received
by the Company. As such, subsequent payments allocated in a manner different
from the percentage allocation mix in effect on the date the payment is received
will be reallocated in accordance with the existing mix on the next scheduled
date unless the Owner's timely request to change the mix or terminate the option
is received by the Company.
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<PAGE>
The Company reserves the right to limit the number of funds that may be used for
automatic transfers and rebalancing, and to discontinue either option upon
advance written notice. The first automatic transfer or rebalancing and all
subsequent transfers or rebalancings of that request in the same Contract year
count as one transfer towards the 12 transfers which are guaranteed to be free
of a transfer charge in each Contract year. Currently, Dollar Cost Averaging and
Automatic Account Rebalancing may not be in effect simultaneously. Either option
may be elected at no additional charge when the Contract is purchased or at a
later date.
E. SURRENDER.
At any time prior to the Annuity Date, an Owner may surrender the Contract and
receive an amount equal to the Surrender Value less any applicable tax
withholding. The Owner must return the Contract and a signed, written request
for surrender, satisfactory to the Company, to the Principal Office. The
Surrender Value will be calculated based on the Contract's Accumulated Value as
of the Valuation Date on which the request and the Contract are received at the
Principal Office.
After the Annuity Date, only Contracts annuitized under a commutable period
certain annuity option may be surrendered. The amount payable is the commuted
value of any unpaid annuity benefit payments, computed on the basis of the
assumed interest rate incorporated in such annuity benefit payments.
Any amount surrendered is normally payable within seven days following the
Company's receipt of the surrender request. The Company reserves the right to
defer surrenders and withdrawals of amounts in each Sub-Account in any period
during which (1) trading on the New York Stock Exchange is restricted as
determined by the SEC or such Exchange is closed for other than weekends and
holidays, (2) the SEC has by order permitted such suspension, or (3) an
emergency, as determined by the SEC, exists such that disposal of portfolio
securities or valuation of assets of a separate account is not reasonably
practicable.
The Company reserves the right to defer surrenders and withdrawals of amounts
allocated to the Company's Fixed Account and Guarantee Period Accounts for a
period not to exceed six months.
The surrender rights of Owners who are participants under Section 403(b) plans
or who are participants in the Texas Optional Retirement Program (Texas ORP) are
restricted; see "Tax-Sheltered Annuities" and "Texas Optional Retirement
Program."
Where an Owner who is trustee under a pension plan surrenders, in whole or in
part, a Contract on a terminating employee, the trustee will be permitted to
reallocate all or a part of the Accumulated Value under the Contract to other
Contracts issued by the Company and owned by the trustee. Any such reallocation
will be at the unit values for the Sub-Accounts as of the Valuation Date on
which a written, signed request is received at the Principal Office.
For important tax consequences which may result from surrender, see "FEDERAL TAX
CONSIDERATIONS."
F. WITHDRAWALS.
At any time prior to the Annuity Date, an Owner may withdraw a portion of the
Accumulated Value of his or her Contract, subject to the limits stated below.
The Owner must submit a signed, written request for withdrawal, satisfactory to
the Company, to the Principal Office. The written request must indicate the
dollar amount the Owner wishes to receive and the accounts from which such
amount is to be withdrawn. Amounts withdrawn from a Guarantee Period Account
prior to the end of the applicable Guarantee Period will be subject to a Market
Value Adjustment against the remaining value, as described under "GUARANTEE
PERIOD ACCOUNTS."
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<PAGE>
Where allocations have been made to more than one account, a percentage of the
withdrawal may be allocated to each such account. A withdrawal from a
Sub-Account will result in cancellation of a number of units
equivalent in value to the amount withdrawn, computed as of the Valuation Date
that the request is received at the Principal Office.
Each withdrawal must be in a minimum amount of $100. Except in New York where no
specific balance is required, no withdrawal will be permitted if the Accumulated
Value remaining under the Contract would be reduced to less than $1,000.
Withdrawals will be paid in accordance with the time limitations described under
"E. Surrender."
For important restrictions on withdrawals which are applicable to Owners who are
participants under Section 403(b) plans or under the Texas ORP, see "FEDERAL TAX
CONSIDERATIONS," "Tax-Sheltered Annuities" and "Texas Optional Retirement
Program."
For important tax consequences which may result from withdrawals, see "FEDERAL
TAX CONSIDERATIONS."
SYSTEMATIC WITHDRAWALS. The Owner may elect an automatic schedule of
withdrawals (systematic withdrawals) from amounts in the Sub-Accounts and/or the
Fixed Account on a monthly, bi-monthly, quarterly, semi-annual or annual basis.
Systematic withdrawals from Guarantee Period Accounts are not available. The
minimum amount of each automatic withdrawal is $100. The Owner may elect, by
written request, a specific dollar amount and the percentage of this amount to
be taken from each designated Sub-Account and/or the Fixed Account, or the Owner
may elect to withdraw a specific percentage of the Accumulated Value calculated
as of the withdrawal dates, and may designate the percentage of this amount
which should be taken from each account. The first withdrawal will take place on
the date the written request is received at the Principal Office or, if later,
on a date specified by the Owner.
If a withdrawal would cause the remaining Accumulated Value to be less than
$1,000, systematic withdrawals may be discontinued. Systematic withdrawals will
cease automatically on the Annuity Date. The Owner may change or terminate
systematic withdrawals only by written request to the Principal Office.
LIFE EXPECTANCY DISTRIBUTIONS. Prior to the Annuity Date, an Owner who also is
the Annuitant may elect to make a series of systematic withdrawals from the
Contract according to the Company's life expectancy distribution ("LED") option
by returning a properly signed LED request form to the Principal Office.
The Owner may elect monthly, bi-monthly, quarterly, semi-annual, or annual LED
distributions, and may terminate the LED option at any time. Under contracts
issued in Hawaii and New York, the LED option will terminate automatically on
the maximum Annuity Date permitted under the Contract, at which time an Annuity
Option must be selected.
If an Owner elects the Company's LED option, in each calendar year a fraction of
the Accumulated Value is withdrawn based on the Owner's then life expectancy (or
the joint life expectancy of the Owner and a beneficiary.) The numerator of the
fraction is 1 (one) and the denominator of the fraction is the remaining life
expectancy of the Owner, as determined annually by the Company. The resulting
fraction, expressed as a percentage, is applied to the Accumulated Value at the
beginning of the year to determine the amount to be distributed during the year.
Under the Company's LED option, the amount withdrawn from the Contract changes
each year, because life expectancy changes each year that a person lives. For
example, actuarial tables indicate that a person age 70 has a life expectancy of
16 years, but a person who attains age 86 has a life expectancy of another 6.5
years. Where the Owner is a trust or other nonnatural person, the Owner may
elect the LED option based on the Annuitant's life expectancy.
(Note: this option may not produce annual distributions that meet the definition
of "substantially equal periodic payments" as defined under Code Section 72(t).
As such, the withdrawals may be treated by the
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<PAGE>
Internal Revenue Service (IRS) as premature distributions from the Contract and
may be subject to a 10% federal tax penalty. Owners seeking distributions over
their life under this definition should consult their tax advisor. For more
information, see "FEDERAL TAX CONSIDERATIONS," "B. Taxation of the Contracts in
General."
The Company may discontinue or change the LED option at any time, but not with
respect to election of the option made prior to the date of any change in the
LED option.
G. DEATH BENEFIT.
In the event that an Owner or (in the event the Owner is a nonnatural person) an
Annuitant dies prior to the Annuity Date, the Company will pay the beneficiary a
death benefit, except where the Contract is continued as provided below in "H.
The Spouse of the Owner as Beneficiary."
DEATH OF AN OWNER PRIOR TO THE ANNUITY DATE. Upon the death of an Owner (or of
an Annuitant if the Owner is a nonnatural person), a death benefit will be paid.
The standard death benefit will be equal to the GREATER of (a) the Accumulated
Value under the Contract increased by any positive Market Value Adjustment; or
(b) gross payments, decreased proportionately to reflect withdrawals (for each
withdrawal, the proportionate reduction is calculated as the death benefit under
this option immediately prior to the withdrawal multiplied by the withdrawal
amount and divided by the Accumulated Value immediately prior to the
withdrawal).
OPTIONAL ENHANCED DEATH BENEFIT RIDER. At the time of application for the
Contract, the Owner if under age 89, may elect an optional Enhanced Death
Benefit Rider. Under the Enhanced Death Benefit Rider:
I. If an Owner (or an Annuitant if the Owner is a nonnatural person) dies before
the Annuity Date and before the oldest Owner's 90th birthday, the death benefit
will be equal to the GREATEST of:
(a) the Accumulated Value increased by any positive Market Value Adjustment; or
(b) gross payments compounded daily at the annual rate of 5%, starting on the
date each payment is applied, decreased proportionately to reflect
withdrawals (in Hawaii and New York the 5% compounding is not available;
therefore (b) equals gross payments decreased proportionately to reflect
withdrawals); or
(c) the highest Accumulated Value on any prior Contract anniversary, increased
for any positive Market Value Adjustment and subsequent payments and
decreased proportionately for subsequent withdrawals.
The (c) value is determined on each Contract anniversary. A snapshot is taken of
the current (a) value and compared to snapshots taken of the (a) value on all
prior Contract anniversaries, AFTER all of the (a) values have been adjusted to
reflect subsequent payments and decreased proportionately for subsequent
withdrawals. The highest of all of these adjusted (a) values then becomes the
(c) value. This (c) value becomes the floor below which the death benefit will
not drop and is locked-in until the next Contract anniversary. The values of (b)
and (c) will be decreased proportionately if withdrawals are taken.
II. If an Owner (or an Annuitant if the Owner is a nonnatural person) dies
before the Annuity Date but after the oldest Owner's 90th birthday, the death
benefit will be equal to the greater of:
(a) the Accumulated Value increased by any positive Market Value Adjustment; or
(b) the death benefit, as calculated under I, that would have been payable on
the Contract anniversary immediately prior to the oldest Owner's 90th
birthday, increased for subsequent payments and decreased proportionately
for subsequent withdrawals.
A separate charge is made for an optional Enhanced Death Benefit Rider. On the
last day of each month and on the date the Rider is terminated, a charge equal
to 1/12th of an annual rate of 0.25% is made against the
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<PAGE>
Accumulated Value of the Contract at that time. The charge is deducted in
arrears through a pro-rata reduction (based on relative values) of Accumulation
Units in the Sub-Accounts, of dollar amounts in the Fixed Account, and of dollar
amounts in the Guarantee Period Accounts.
PAYMENT OF THE DEATH BENEFIT. The death benefit generally will be paid to the
beneficiary in one sum within seven business days of the receipt of due proof of
death at the Principal Office unless the Owner has specified a death benefit
annuity option. Instead of payment in one sum, the beneficiary may, by written
request, elect to:
(1) defer distribution of the death benefit for a period no more than five
years from the date of death; or
(2) receive a life annuity or an annuity for a period certain not extending
beyond the beneficiary's life expectancy, with annuity benefit payments
beginning one year from the date of death.
If distribution of the death benefit is deferred under (1) or (2), any value in
the Guarantee Period Accounts will be transferred to the Sub-Account investing
in the Money Market Fund. The excess, if any, of the death benefit over the
Accumulated Value also will be transferred to the Sub-Account investing in the
Money Market Fund. The beneficiary may, by written request, effect transfers and
withdrawals during the deferral period and prior to annuitization under (2), but
may not make additional payments. The death benefit will reflect any earnings or
losses experienced during the deferral period. If there are multiple
beneficiaries, the consent of all is required.
With respect to the death benefit, the Accumulated Value under the Contract will
be based on the unit values next computed after due proof of the death has been
received.
H. THE SPOUSE OF THE OWNER AS BENEFICIARY.
The Owner's spouse, if named as the sole beneficiary, may by written request
continue the Contract in lieu of receiving the amount payable upon death of the
Owner. The spouse will then become the Owner and Annuitant subject to the
following: (1) any value in the Guarantee Period Accounts will be transferred to
the Sub-Account investing in the Money Market Fund; (2) the excess, if any, of
the death benefit over the Contract's Accumulated Value also will be transferred
to the Sub-Account investing in the Money Market Fund. Additional payments may
be made. All other rights and benefits provided in the Contract will continue,
except that any subsequent spouse of such new Owner will not be entitled to
continue the Contract upon such new Owner's death.
I. ASSIGNMENT.
The Contract, other than one sold in connection with certain qualified plans,
may be assigned by the Owner at any time prior to the Annuity Date and prior to
the death of an Owner (see "FEDERAL TAX CONSIDERATIONS"). The Company will not
be deemed to have knowledge of an assignment unless it is made in writing and
filed at the Principal Office. The Company will not assume responsibility for
determining the validity of any assignment. If an assignment of the Contract is
in effect on the Annuity Date, the Company reserves the right to pay to the
assignee, in one sum, that portion of the Surrender Value of the Contract to
which the assignee appears to be entitled. The Company will pay the balance, if
any, in one sum to the Owner in full settlement of all liability under the
Contract. The interest of the Owner and of any beneficiary will be subject to
any assignment.
J. ELECTING THE FORM OF ANNUITY AND THE ANNUITY DATE.
The Owner selects the Annuity Date. To the extent permitted by state law, the
Annuity Date may be the first day of any month (1) before the Owner's 85th
birthday, if the Owner's age on the issue date of the Contract is 75 or under;
or (2) within ten years from the issue date of the Contract and before the
Owner's 90th birthday, if the Owner's age on the issue date is between 76 and
90. The Owner may elect to change the Annuity Date by
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<PAGE>
sending a request to the Principal Office at least one month before the Annuity
Date. To the extent permitted by state law, the new Annuity Date must be the
first day of any month occurring before the Owner's 99th birthday. In no event
will the maximum annuitization age exceed 99. If there are Joint Owners, the age
of the younger will determine the Annuity Date. The Internal Revenue Code ("the
Code") and the terms of qualified plans impose limitations on the age at which
annuity benefit payments may commence and the type of annuity option selected.
See "FEDERAL TAX CONSIDERATIONS" for further information.
Subject to certain restrictions described below, the Owner has the right (1) to
select the annuity option under which annuity benefit payments are to be made,
and (2) to determine whether payments are to be made on a fixed basis, a
variable basis, or a combination fixed and variable basis. Annuity benefit
payments are determined according to the annuity tables in the Contract, by the
annuity option selected, and by the investment performance of the account(s)
selected.
To the extent a fixed annuity benefit payment option is selected, Accumulated
Value will be transferred to the Fixed Account of the Company, and the annuity
benefit payments will be fixed in amount. See APPENDIX A, "MORE INFORMATION
ABOUT THE FIXED ACCOUNT."
Under a variable annuity payout option, a payment to the Owner, or the payee the
Owner designates, equal to the value of the fixed number of Annuity Units in the
Sub-Account(s) is made monthly, quarterly, semi-annually or annually. Since the
value of an Annuity Unit in a Sub-Account will reflect the investment
performance of the Sub-Account, the amount of each annuity benefit payment will
vary.
The annuity option selected must produce an initial payment of at least $50 (a
lower amount may be required in some states). The Company reserves the right to
increase this minimum amount. If the annuity option(s) selected do(es) not
produce an initial payment which meet this minimum, a single payment may be
made. Once the Company begins making annuity benefit payments, the Owner cannot
make withdrawals or surrender the annuity benefit, except where the Owner has
elected a commutable period certain option. Beneficiaries entitled to receive
remaining payments under either a commutable or noncommutable "period certain"
option may elect instead to receive a lump sum settlement. See "K. Description
of Variable Annuity Payout Options" below.
If the Owner does not elect an option, a variable life annuity with periodic
payments guaranteed for ten years will be purchased. Changes in either the
Annuity Date or annuity option can be made up to one month prior to the Annuity
Date.
If the owner of a fixed annuity contract issued by the Company wishes to elect a
variable annuity option after annuitization, the Company may permit such owner
to exchange the fixed contract for a Contract offered in this Prospectus. The
proceeds of the fixed contract will be applied towards the variable annuity
option desired by the owner. The number of Annuity Units under the option will
be calculated using the Annuity Unit values as of the 15th of the month
preceding the Annuity Date.
If the Owner exercises the Minimum Guaranteed Annuity Payout Rider, annuity
benefit payments must be made under a fixed annuity payout option involving a
life contingency and will be determined based on the guaranteed annuity purchase
rates listed under the Annuity Tables in the Contract.
K. DESCRIPTION OF VARIABLE ANNUITY PAYOUT OPTIONS.
The Company provides the variable annuity payout options described below.
Currently, variable annuity payout options may be funded through the
Sub-Accounts investing in the Select Growth and Income Fund, the Select Income
Fund, the Select Growth Fund and the Money Market Fund.
The Company currently also provides these same options funded through the Fixed
Account (fixed-amount annuity payout option). Regardless of how payments were
allocated during the accumulation period, any of the
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<PAGE>
variable annuity options or the fixed-amount options may be selected, or any of
the variable annuity options may be selected in combination with any of the
fixed-amount annuity options. Other annuity options may be offered by the
Company. IRS regulations may not permit certain of the available annuity options
when used in connection with certain qualified Contracts.
If the Owner (or, if there are Joint Owners, the surviving Joint Owner) dies on
or after the Annuity Date, the beneficiary will become the Owner of the contract
and any remaining annuity benefit payments will continue to the beneficiary in
accordance with the terms of the annuity benefit payment option selected prior
to the Annuity Date. If there are Joint Owners on or after the Annuity Date,
upon the first Owner death, any remaining annuity benefit payments will continue
to the surviving Joint Owner in accordance with the terms of the annuity benefit
payment option selected prior to the Annuity Date.
If the Owner selects an annuity payout option which provides for the
continuation of payments after the death of an Annuitant, upon the death of an
Annuitant on or after the Annuity Date, any remaining payments will continue to
be paid to the Owner or the payee the Owner has designated.
VARIABLE LIFE ANNUITY WITH PAYMENTS GUARANTEED FOR TEN YEARS. This variable
annuity is payable periodically during the lifetime of the Annuitant with the
guarantee that if the Annuitant should die before the guaranteed number of
payments have been made, the remaining guaranteed payments will continue to be
paid.
VARIABLE LIFE ANNUITY PAYABLE PERIODICALLY DURING LIFETIME OF THE ANNUITANT
ONLY. This variable annuity is payable during the Annuitant's life. It would be
possible under this option for the Owner to receive only one annuity benefit
payment if the Annuitant dies prior to the due date of the second annuity
benefit payment, two annuity benefit payments if the Annuitant dies before the
due date of the third annuity benefit payment, and so on. Payments will
continue, however, during the lifetime of the Annuitant, no matter how long he
or she lives.
UNIT REFUND VARIABLE LIFE ANNUITY. This is an annuity payable periodically
during the lifetime of the Annuitant with the guarantee that if the Annuitant
dies and (1) exceeds (2), then periodic variable annuity benefit payments will
continue until the number of such payments equals the number determined in (1).
Where: (1) is the dollar amount of the Accumulated Value at annuitization
divided by the dollar amount of the first payment, and
(2) is the number of payments paid prior to the death of the Annuitant.
JOINT AND SURVIVOR VARIABLE LIFE ANNUITY. This variable annuity is payable
during the joint lifetime of the Annuitant and another individual (i.e. the
beneficiary or a Joint Annuitant), and then continues thereafter during the
lifetime of the survivor. The amount of each payment during the lifetime of the
survivor is based on the same number of Annuity Units which applied during their
joint lifetime. There is no minimum number of payments under this option.
JOINT AND TWO-THIRDS SURVIVOR VARIABLE LIFE ANNUITY. This variable annuity is
payable during the joint lifetime of the Annuitant and one other individual
(i.e. the beneficiary or a Joint Annuitant), and then continues thereafter
during the lifetime of the survivor. The amount of each periodic payment during
the lifetime of the survivor, however, is based upon two-thirds of the number of
Annuity Units which applied during their joint lifetime. There is no minimum
number of payments under this option.
PERIOD CERTAIN VARIABLE ANNUITY. This variable annuity has periodic payments
for a stipulated number of years ranging from one to thirty and may be
commutable or noncommutable. If the Annuitant dies before the end of the period,
remaining payments will continue to be paid. A commutable option provides the
Owner with the right to request a lump sum payment of any remaining balance
after annuity payments have commenced. Under a noncommutable period certain
option, the Owner may not request a lump sum payment. See "Annuity Benefit
Payments" in the SAI.
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It should be noted that the period certain option does not involve a life
contingency. In computing payments under this option, the Company deducts a
charge for annuity rate guarantees, which includes a factor for mortality risks.
Although not contractually required to do so, the Company currently follows a
practice of permitting persons receiving payments under a period certain option
to elect to convert to a variable annuity involving a life contingency. The
Company may discontinue or change this practice at any time, but not with
respect to election of the option made prior to the date of any change in this
practice.
L. ANNUITY BENEFIT PAYMENTS.
DETERMINATION OF THE FIRST VARIABLE ANNUITY BENEFIT PAYMENT. The amount of the
first monthly payment depends upon the selected variable annuity option, the sex
(however, see "N. NORRIS Decision" below) and age of the Annuitant, and the
value of the amount applied under the annuity option ("annuity value"). The
Contract provides annuity rates that determine the dollar amount of the first
periodic payment under each variable annuity option for each $1,000 of applied
value. From time to time, the Company may offer its Owners both fixed and
variable annuity rates more favorable than those contained in the Contract. Any
such rates will be applied uniformly to all Owners of the same class.
The dollar amount of the first periodic annuity benefit payment is calculated
based upon the type of annuity option chosen, as follows:
- For life annuity options and noncommutable period certain options of ten
years or more (six or more years under New York Contracts), the dollar
amount is determined by multiplying (1) the Accumulated Value applied
under that option (after application of any Market Value Adjustment and
less premium tax, if any) divided by $1,000, by (2) the applicable amount
of the first monthly payment per $1,000 of value.
- For commutable period certain options and any period certain option of
less than ten years (less than six years under New York Contracts), the
dollar amount is determined by multiplying (1) the Surrender Value less
premium taxes, if any, applied under that option (after application of any
Market Value Adjustment and less premium tax, if any) divided by $1,000,
by (2) the applicable amount of the first monthly payment per $1,000 of
value.
- For a death benefit annuity, the annuity value will be the amount of the
death benefit.
The first periodic annuity benefit payment is based upon the Accumulated Value
as of a date not more than four weeks preceding the date that the first annuity
benefit payment is due. The Company transmits variable annuity benefit payments
for receipt by the payee by the first of a month. Variable annuity benefit
payments are currently based on unit values as of the 15th day of the preceding
month.
THE ANNUITY UNIT. On and after the Annuity Date, the Annuity Unit is a measure
of the value of the monthly annuity benefit payments under a variable annuity
option. The value of an Annuity Unit in each Sub-Account initially was set at
$1.00. The value of an Annuity Unit under a Sub-Account on any Valuation Date
thereafter is equal to the value of such unit on the immediately preceding
Valuation Date, multiplied by the net investment factor of the Sub-Account for
the current Valuation Period and divided by the assumed interest rate for the
current Valuation Period The assumed interest rate, discussed below, is
incorporated in the variable annuity options offered in the Contract.
DETERMINATION OF THE NUMBER OF ANNUITY UNITS. The dollar amount of the first
variable annuity benefit payment is divided by the value of an Annuity Unit of
the selected Sub-Account(s) to determine the number of Annuity Units represented
by the first payment. This number of Annuity Units remains fixed under all
annuity options except the joint and two-thirds survivor annuity option.
DOLLAR AMOUNT OF SUBSEQUENT VARIABLE ANNUITY BENEFIT PAYMENTS. The dollar
amount of each periodic variable annuity benefit payment after the first will
vary with the value of the Annuity Units of the selected
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<PAGE>
Sub-Account(s). The dollar amount of each subsequent variable annuity benefit
payment is determined by multiplying the fixed number of Annuity Units (derived
from the dollar amount of the first payment, as described above) with respect to
a Sub-Account by the value of an Annuity Unit of that Sub-Account on the
applicable Valuation Date.
The variable annuity options offered by the Company are based on a 3.5% assumed
interest rate, which affects the amounts of the variable annuity benefit
payments. Variable annuity benefit payments with respect to a Sub-Account will
increase over periods when the actual net investment result of the Sub-Account
exceeds the equivalent of the assumed interest rate. Variable annuity benefit
payments will decrease over periods when the actual net investment results are
less than the equivalent of the assumed interest rate.
For an illustration of a calculation of a variable annuity benefit payment using
a hypothetical example, see "Annuity Benefit Payments" in the SAI.
If the Owner elects the Minimum Guaranteed Annuity Payout Rider, at
annuitization the annuity benefit payments provided under the Rider (by applying
the guaranteed annuity factors to the Minimum Guaranteed Annuity Payout Benefit
Base), are compared to the payments that would otherwise be available with the
Rider. If annuity benefit payments under the Rider are higher, the Owner may
exercise the Rider, provided that the conditions of the Rider are met. If
annuity benefit payments under the Rider are lower, the Owner may choose not to
exercise the Rider and instead annuitize under current annuity factors. See "M.
Optional Minimum Guaranteed Annuity Payout Rider," below.
M. OPTIONAL MINIMUM GUARANTEED ANNUITY PAYOUT RIDER
Subject to state availability, an optional Minimum Guaranteed Annuity Payout
Rider is available for a separate monthly charge. The Minimum Guaranteed Annuity
Payout Rider guarantees a minimum amount of fixed lifetime income during the
annuity payout phase, subject to the conditions described below. On each
Contract anniversary a Minimum Guaranteed Annuity Payout Benefit Base is
determined. The Minimum Guaranteed Annuity Payout Benefit Base (less any
applicable premium taxes) is the value that will be annuitized if the Rider is
exercised. In order to exercise the Rider, a fixed annuitization option
involving a life contingency must be selected. Annuitization under this Rider
will occur at the guaranteed annuity purchase rates listed under the Annuity
Option Tables in the Contract. The Minimum Guaranteed Annuity Payout Benefit
Base is equal to the greatest of:
(a) the Accumulated Value increased by any positive Market Value Adjustment, if
applicable; or
(b) the Accumulated Value on the effective date of the Rider compounded daily at
the annual rate of 5% plus gross payments made thereafter compounded daily
at the annual rate of 5%, starting on the date each payment is applied,
decreased proportionately to reflect withdrawals; or
(c) the highest Accumulated Value on any prior Contract anniversary since the
Rider effective date as determined after positive adjustments have been made
for subsequent payments and any positive Market Value Adjustment, if
applicable, and negative adjustments, have been made for subsequent
withdrawals.
For each withdrawal described in (b) and (c) above, the proportionate reduction
is calculated by multiplying the (b) or (c) value, whichever is applicable,
determined immediately prior to the withdrawal by the following fraction:
amount of the withdrawal
----------------------------------------------------------
Accumulated Value determined immediately prior to the withdrawal
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<PAGE>
CONDITIONS OF ELECTION OF THE MINIMUM GUARANTEED ANNUITY PAYOUT RIDER.
- The Owner may elect the Minimum Guaranteed Annuity Payout Rider at
Contract issue or at any time thereafter, however, if the Rider is not
elected within thirty days after Contract issue or within thirty days
after a Contract anniversary date, the effective date of the Rider will be
the following Contract anniversary date.
- The Owner may not elect a Rider with a ten-year waiting period if at the
time of election the Annuitant has reached his/her 87th birthday. The
Owner may not elect a Rider with a fifteen-year waiting period if at the
time of election the Annuitant has reached his/her 82nd birthday.
EXERCISING THE MINIMUM GUARANTEED ANNUITY PAYOUT RIDER.
- The Owner may only exercise the Minimum Guaranteed Annuity Payout Rider
within thirty days after any Contract anniversary following the expiration
of a ten or fifteen-year waiting period from the effective date of the
Rider.
- The Owner may only annuitize under a fixed annuity payout option involving
a life contingency as provided under "K. Description of Variable Annuity
Payout Options."
- The Owner may only annuitize at the guaranteed annuity purchase rates
listed under the Annuity Option Tables in the Contract.
TERMINATION OF THE MINIMUM GUARANTEED ANNUITY PAYOUT RIDER.
- The Owner may not terminate the Minimum Guaranteed Annuity Payout Rider
prior to the seventh Contract anniversary after the effective date of the
Rider, unless such termination occurs on or within thirty days after any
contract anniversary and in conjunction with the repurchase of a Minimum
Guaranteed Annuity Payout Rider with a waiting period of equal or greater
length at its then current price, if available.
- After the seventh Contract anniversary from the effective date of the
Rider the Owner may terminate the Rider at any time.
- The Owner may repurchase a Rider with a waiting period equal to or greater
than the Rider then in force at the new Rider's then current price, if
available, however, repurchase may only occur on or within thirty days of
a Contract anniversary.
- Other than in the event of a repurchase, once terminated the Rider may not
be purchased again.
- The Rider will terminate upon surrender of the Contract or the date that a
death benefit is payable if the Contract is not continued under "H. The
Spouse of the Owner as Beneficiary" (see "DESCRIPTION OF THE CONTRACT").
From time to time the Company may illustrate minimum guaranteed income amounts
under the Minimum Guaranteed Annuity Payout Rider for individuals based on a
variety of assumptions, including varying rates of return on the value of the
Contract during the accumulation phase, annuity payout periods, annuity payout
options and Minimum Guaranteed Annuity Payout Rider waiting periods. Any assumed
rates of return are for purposes of illustration only and are not intended as a
representation of past or future investment rates of return.
For example, the illustration below assumes an initial payment of $100,000 for
an Owner age 60 (at issue) and exercise of a Minimum Guaranteed Annuity Payout
Rider with a ten-year waiting period. The illustration assumes that no
subsequent payments or withdrawals are made and that the annuity payout option
is a Life Annuity With Payments Guaranteed For 10 Years. The values below have
been computed based on a 5% rate of return and are the guaranteed minimums that
would be received under the Minimum Guaranteed Annuity
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Payout Rider. The minimum guaranteed benefit base amounts are the values that
will be annuitized. Minimum guaranteed annual income values are based on a fixed
annuity payout.
<TABLE>
<CAPTION>
MINIMUM MINIMUM
CONTRACT GUARANTEED GUARANTEED
ANNIVERSARY BENEFIT ANNUAL
AT EXERCISE BASE INCOME(1)
--------------- ----------- -----------
<S> <C> <C> <C> <C>
10 $ 162,889 $ 12,153
15 $ 207,892 $ 17,695
</TABLE>
(1) Other fixed annuity options involving a life contingency other than Life
Annuity With Payments Guaranteed for 10 Years are available. See "K. Description
of Variable Annuity Payout Options."
The Minimum Guaranteed Annuity Payout Rider does not create Accumulated Value or
guarantee performance of any investment option. Because this Rider is based on
conservative actuarial factors, the level of lifetime income that it guarantees
may often be less than the level that would be provided by application of
Accumulated Value at current annuity factors. Therefore, the Rider should be
regarded as a safety net. As described above, withdrawals will reduce the
benefit base.
N. NORRIS DECISION.
In the case of ARIZONA GOVERNING COMMITTEE V. NORRIS, the United States Supreme
Court ruled that, in connection with retirement benefit options offered under
certain employer-sponsored employee benefit plans, annuity options based on
sex-distinct actuarial tables are not permissible under Title VII of the Civil
Rights Act of 1964. The ruling requires that benefits derived from contributions
paid into a plan after August 1, 1983 be calculated without regard to the sex of
the employee. Annuity benefits attributable to payments received by the Company
under a Contract issued in connection with an employer-sponsored benefit plan
affected by the NORRIS decision will be based on the greater of (1) the
Company's unisex Non-Guaranteed Current Annuity Option Rates or (2) the
guaranteed unisex rates described in such Contract, regardless of whether the
Annuitant is male or female.
O. COMPUTATION OF VALUES.
THE ACCUMULATION UNIT. Each net payment is allocated to the account(s) selected
by the Owner. Allocations to the Sub-Accounts are credited to the Contract in
the form of Accumulation Units. Accumulation Units are credited separately for
each Sub-Account. The number of Accumulation Units of each Sub-Account credited
to the Contract is equal to the portion of the net payment allocated to the
Sub-Account, divided by the dollar value of the applicable Accumulation Unit as
of the Valuation Date the payment is received at the Principal Office. The
number of Accumulation Units resulting from each payment will remain fixed
unless changed by a subsequent split of Accumulation Unit value, a transfer, a
withdrawal, or surrender. The dollar value of an Accumulation Unit of each
Sub-Account varies from Valuation Date to Valuation Date based on the investment
experience of that Sub-Account, and will reflect the investment performance,
expenses and charges of its Underlying Funds. The value of an Accumulation Unit
at inception was set at $1.00 on the first Valuation Date for each Sub-Account.
Allocations to the Guarantee Period Accounts and the Fixed Account are not
converted into Accumulation Units, but are credited interest at a rate
periodically set by the Company. See APPENDIX A, "MORE INFORMATION ABOUT THE
FIXED ACCOUNT" and "GUARANTEE PERIOD ACCOUNTS."
The Accumulated Value under the Contract is determined by (1) multiplying the
number of Accumulation Units in each Sub-Account by the value of an Accumulation
Unit of that Sub-Account on the Valuation Date, (2) adding the products, and (3)
adding the amount of the accumulations in the Fixed Account and Guarantee Period
Accounts, if any.
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NET INVESTMENT FACTOR. The Net Investment Factor is an index that measures the
investment performance of a Sub-Account from one Valuation Period to the next.
This factor is equal to 1.000000 plus the result from dividing (1) by (2) and
subtracting (3) and (4) where:
(1) is the investment income of a Sub-Account for the Valuation Period,
including realized or unrealized capital gains and losses during the
Valuation Period, adjusted for provisions made for taxes, if any;
(2) is the value of that Sub-Account's assets at the beginning of the Valuation
Period;
(3) is a charge for mortality and expense risks equal to 1.25% on an annual
basis of the daily value of the Sub-Account's assets; and
(4) is an administrative charge equal to 0.15% on an annual basis of the daily
value of the Sub-Account's assets.
The dollar value of an Accumulation Unit as of a given Valuation Date is
determined by multiplying the dollar value of the corresponding Accumulation
Unit as of the immediately preceding Valuation Date by the appropriate net
investment factor.
For an illustration of an Accumulation Unit calculation using a hypothetical
example see the SAI.
CHARGES AND DEDUCTIONS
Deductions under the Contract and charges against the assets of the Sub-Accounts
are described below. Other deductions and expenses paid out of the assets of the
Underlying Funds are described in the prospectuses and SAIs of the Underlying
Funds.
A. VARIABLE ACCOUNT DEDUCTIONS.
MORTALITY AND EXPENSE RISK CHARGE. The Company assesses a charge against the
assets of each Sub-Account to compensate for certain mortality and expense risks
it has assumed. The charge is imposed during both the accumulation phase and the
annuity payout phase. The mortality risk arises from the Company's guarantee
that it will make annuity benefit payments in accordance with annuity rate
provisions established at the time the Contract is issued for the life of the
Annuitant (or in accordance with the annuity payout option selected), no matter
how long the Annuitant (or other individual) lives and no matter how long all
Annuitants as a class live. Therefore, the mortality charge is deducted during
the annuity payout phase on all Contracts, including those that do not involve a
life contingency, even though the Company does not bear direct mortality risk
with respect to variable annuity settlement options that do not involve life
contingencies. The expense risk arises from the Company's guarantee that the
charges it makes will not exceed the limits described in the Contract and in
this Prospectus.
If the charge for mortality and expense risks is not sufficient to cover actual
mortality experience and expenses, the Company will absorb the losses. If
expenses are less than the amounts provided to the Company by the charge, the
difference will be a profit to the Company. To the extent this charge results in
a profit to the Company, such profit will be available for use by the Company
for, among other things, the payment of distribution, sales and other expenses.
Since mortality and expense risks involve future contingencies which are not
subject to precise determination in advance, it is not feasible to identify
specifically the portion of the charge which is applicable to each. The Company
intends to recoup commissions and other sales expenses through profits from the
Company's General Account, which may include amounts derived from mortality and
expense risk charges.
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ADMINISTRATIVE EXPENSE CHARGE. The Company assesses each Sub-Account with a
daily charge at an annual rate of 0.15% of the average daily net assets of the
Sub-Account. The charge is imposed during both the accumulation phase and the
annuity payout phase. The daily Administrative Expense Charge is assessed to
help defray administrative expenses actually incurred in the administration of
the Sub-Account, without profits. There is no direct relationship, however,
between the amount of administrative expenses imposed on a given Contract and
the amount of expenses actually attributable to that Contract.
Deductions for the Contract fee (see "B. Contract Fee" below) and for the
Administrative Expense Charge are designed to reimburse the Company for the cost
of administration and related expenses and are not expected to be a source of
profit. The administrative functions and expense assumed by the Company in
connection with the Variable Account and the Contract include, but are not
limited to, clerical, accounting, actuarial and legal services, rent, postage,
telephone, office equipment and supplies, expenses of preparing and printing
registration statements, expense of preparing and typesetting prospectuses and
the cost of printing prospectuses not allocable to sales expense, filing and
other fees.
OTHER CHARGES. Because the Sub-Accounts purchase shares of the Underlying
Funds, the value of the net assets of the Sub-Accounts will reflect the
investment advisory fee and other expenses incurred by the Underlying Funds. The
prospectuses and SAIs of the Underlying contain additional information
concerning expenses of the Underlying Funds.
B. CONTRACT FEE.
A $35 Contract fee currently is deducted on the Contract anniversary and upon
full surrender of the Contract if the Accumulated Value on any of these dates is
less than $75,000. (This fee may vary by state. See your Contract for more
information.) Where Contract value has been allocated to more than one account,
a percentage of the total Contract fee will be deducted from the value in each
account. The portion of the charge deducted from each account will be equal to
the percentage which the value in that account bears to the Accumulated Value
under the Contract. The deduction of the Contract fee from a Sub-Account will
result in cancellation of a number of Accumulation Units equal in value to the
percentage of the charge deducted from that account.
Where permitted by law, the Contract fee also may be waived for Contracts where,
on the issue date, either the Owner or the Annuitant is within the following
class of individuals: employees and registered representatives of any
broker-dealer which has entered into a sales agreement with the Company to sell
the Contract; employees of the Company, its affiliates and subsidiaries;
officers, directors, trustees and employees of any of the Funds; investment
managers or sub-advisers; and the spouses of and immediate family members
residing in the same household with such eligible persons. "Immediate family
members" means children, siblings, parents and grandparents.
C. OPTIONAL BENEFIT RIDER CHARGES
Subject to state availability, the Company offers optional benefit riders that
may be elected by the Owner. A separate monthly charge is made for each rider
selected. On the last day of each month and on the date the rider is terminated,
a charge equal to 1/12th of the applicable annual rate (see table below) is made
against the Accumulated Value of the Contract at that time. The charge is made
through a pro-rata reduction of the Accumulated Value of the Sub-Accounts, the
Fixed Account and the Guarantee Period Accounts (based on the relative value
that the Accumulation Units of the Sub-Accounts, the dollar amounts in the Fixed
Account and the dollar amounts in the Guarantee Period Accounts bear to the
total Accumulated Value).
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The applicable charge is assessed on the Accumulated Value on the last day of
each month and on the date the rider is terminated, multiplied by 1/12th of the
following annual percentage rates:
<TABLE>
<S> <C>
Minimum Guaranteed Annuity Payout Rider with ten-year waiting period....... 0.25%
Minimum Guaranteed Annuity Payout Rider with fifteen-year waiting period... 0.15%
Enhanced Death Benefit Rider............................................... 0.25%
</TABLE>
For a description of the Enhanced Death Benefit Rider, see "G. Death Benefit"
and for a description of the Minimum Guaranteed Annuity Payout Rider, see "M.
Optional Minimum Guaranteed Annuity Payout Rider," under "DESCRIPTION OF THE
CONTRACT," above.
D. PREMIUM TAXES.
Some states and municipalities impose a premium tax on variable annuity
contracts. State premium taxes currently range up to 3.5%.
The Company makes a charge for state and municipal premium taxes, when
applicable, and deducts the amount paid as a premium tax charge. The current
practice of the Company is to deduct the premium tax charge in one of two ways:
1. if the premium tax was paid by the Company when payments were received,
the premium tax charge is deducted on a pro-rata basis when withdrawals
are made, upon surrender of the Contract, or when annuity benefit
payments begin (the Company reserves the right instead to deduct the
premium tax charge for a Contract at the time payments are received); or
2. the premium tax charge is deducted in total when annuity benefit
payments begin.
In no event will a deduction be taken before the Company has incurred a tax
liability under applicable state law.
If no amount for premium tax was deducted at the time the payment was received,
but subsequently tax is determined to be due prior to the Annuity Date, the
Company reserves the right to deduct the premium tax from the Contract value at
the time such determination is made.
E. TRANSFER CHARGE.
The Company currently makes no charge for processing transfers. The Company
guarantees that the first 12 transfers in a Contract year will be free of
transfer charge, but reserves the right to assess a charge, guaranteed never to
exceed $25, for each subsequent transfer in a Contract year to reimburse it for
the expense of processing transfers. For more information, see "D. Transfer
Privilege."
GUARANTEE PERIOD ACCOUNTS
Due to certain exemptive and exclusionary provisions in the securities laws,
interests in the Guarantee Period Accounts and the Company's Fixed Account are
not registered as an investment company under the provisions of the 1933 Act or
the 1940 Act. Accordingly, the staff of the SEC has not reviewed the disclosures
in this Prospectus relating to the Guarantee Period Accounts or the Fixed
Account. Nevertheless, disclosures regarding the Guarantee Period Accounts and
the Fixed Account of this Contract or any fixed benefits offered under these
accounts may be subject to the provisions of the 1933 Act relating to the
accuracy and completeness of statements made in the Prospectus.
INVESTMENT OPTIONS. In most jurisdictions, Guarantee Periods ranging from two
through ten years may be available. Each Guarantee Period established for the
Owner is accounted for separately in a non-unitized segregated account, except
in California where it is accounted for in the Company's General Account. Each
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Guarantee Period Account provides for the accumulation of interest at a
Guaranteed Interest Rate. The Guaranteed Interest Rate on amounts allocated or
transferred to a Guarantee Period Account is determined from time to time by the
Company in accordance with market conditions. Once an interest rate is in effect
for a Guarantee Period Account, however, the Company may not change it during
the duration of its Guarantee Period. In no event will the Guaranteed Interest
Rate be less than 3%.
To the extent permitted by law, the Company reserves the right at any time to
offer Guarantee Periods with durations that differ from those which were
available when a Contract initially was issued and to stop accepting new
allocations, transfers or renewals to a particular Guarantee Period.
Owners may allocate net payments or make transfers from any of the Sub-Accounts,
the Fixed Account or an existing Guarantee Period Account to establish a new
Guarantee Period Account at any time prior to the Annuity Date. Transfers from a
Guarantee Period Account on any date other than on the day following the
expiration of that Guarantee Period will be subject to a Market Value
Adjustment. The Company establishes a separate investment account each time the
Owner allocates or transfers amounts to a Guarantee Period except that amounts
allocated to the same Guarantee Period on the same day will be treated as one
Guarantee Period Account. The minimum that may be allocated to establish a
Guarantee Period Account is $1,000. If less than $1,000 is allocated, the
Company reserves the right to apply that amount to the Money Market Fund. The
Owner may allocate amounts to any of the Guarantee Periods available.
At least 45 days (but not more than 75 days) prior to the end of a Guarantee
Period, the Company will notify the Owner in writing of the expiration of that
Guarantee Period. At the end of a Guarantee Period the Owner may transfer
amounts to the Sub-Accounts, the Fixed Account or establish a new Guarantee
Period Account of any duration then offered by the Company without a Market
Value Adjustment. If reallocation instructions are not received at the Principal
Office before the end of a Guarantee Period, the account value automatically
will be applied to a new Guarantee Period Account with the same duration unless
(1) less than $1,000 would remain in the Guarantee Period Account on its
expiration date, or (2) the Guarantee Period would extend beyond the Annuity
Date or is no longer available. In such cases, the Guarantee Period Account
value will be transferred to the Sub-Account investing in the Money Market Fund.
Where amounts have been renewed automatically in a new Guarantee Period, it is
the Company's current practice to give the Owner an additional 30 days to
transfer out of the Guarantee Period Account without application of a Market
Value Adjustment. This practice may be discontinued or changed at the Company's
discretion. Under contracts issued in New York, the Company will transfer monies
out of the Guarantee Period Account without application of a Market Value
Adjustment if the Owner's request is received within ten days of the renewal
date.
MARKET VALUE ADJUSTMENT. No Market Value Adjustment will be applied to
transfers, withdrawals, or a surrender from a Guarantee Period Account on the
expiration of its Guarantee Period. In addition, no negative Market Value
Adjustment will be applied to a death benefit. However, a positive Market Value
Adjustment, if any, will increase the value of the death benefit when based on
the Contract's Accumulated Value. See "G. Death Benefit." All other transfers,
withdrawals, or a surrender prior to the end of a Guarantee Period will be
subject to a Market Value Adjustment, which may increase or decrease the account
value. Amounts applied under an annuity option are treated as withdrawals when
calculating the Market Value Adjustment. The Market Value Adjustment will be
determined by multiplying the amount taken from each Guarantee Period Account by
the market value factor. The market value factor for each Guarantee Period
Account is equal to:
[(1+i)/(1+j)](n/365) - 1
where: I is the Guaranteed Interest Rate expressed as a decimal for
example: (3% = 0.03) being credited to the current Guarantee
Period;
J is the new Guaranteed Interest Rate, expressed as a decimal,
for a Guarantee Period with a duration equal to the number of
years remaining in the current Guarantee Period, rounded to
the next higher number of whole years. If that rate is not
available, the Company will use a suitable rate or index
allowed by the Department of Insurance; and
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N is the number of days remaining from the Valuation Date to the
end of the current Guarantee Period.
Based on the application of this formula, the value of a Guarantee Period
Account will increase after the Market Value Adjustment is applied if the then
current market rates are lower than the rate being credited to the Guarantee
Period Account. Similarly, the value of a Guarantee Period Account will decrease
after the Market Value Adjustment is applied if the then current market rates
are higher than the rate being credited to the Guarantee Period Account. The
Market Value Adjustment is limited, however, so that even if the account value
is decreased after application of a Market Value Adjustment, it will equal or
exceed the Owner's principal plus 3% earnings per year less applicable Contract
fees. Conversely, if the then current market rates are lower and the account
value is increased after the Market Value Adjustment is applied, the increase in
value is also affected by the minimum guaranteed rate of 3% such that the amount
that will be added to the Guarantee Period Account is limited to the difference
between the amount earned and the 3% minimum guaranteed earnings. For examples
of how the Market Value Adjustment works, See APPENDIX D, "THE MARKET VALUE
ADJUSTMENT."
WITHDRAWALS. Prior to the Annuity Date, the Owner may make withdrawals of
amounts held in the Guarantee Period Accounts. Withdrawals from these accounts
will be made in the same manner and be subject to the same rules as set forth
under "F. Withdrawals" and "E. Surrender." In addition, the following provisions
also apply to withdrawals from a Guarantee Period Account: (1) a Market Value
Adjustment will apply to all withdrawals, unless made at the end of the
Guarantee Period; and (2) the Company reserves the right to defer payments of
amounts withdrawn from a Guarantee Period Account for up to six months from the
date it receives the withdrawal request. If deferred for 30 days or more, the
Company will pay interest on the amount deferred at a rate of at least 3%.
In the event that a Market Value Adjustment applies to a withdrawal of a portion
of the value of a Guarantee Period Account, it will be calculated on the amount
requested and deducted or added to the amount remaining in the Guarantee Period
Account. If the entire amount in a Guarantee Period Account is requested, the
adjustment will be made to the amount payable.
FEDERAL TAX CONSIDERATIONS
The effect of federal income taxes on the value of a Contract, on withdrawals or
surrenders, on annuity benefit payments, and on the economic benefit to the
Owner or beneficiary depends upon a variety of factors. The following discussion
is based upon the Company's understanding of current federal income tax laws as
they are interpreted as of the date of this Prospectus. No representation is
made regarding the likelihood of continuation of current federal income tax laws
or of current interpretations by the IRS. In addition, this discussion does not
address state or local tax consequences that may be associated with the
Contract.
IT SHOULD BE RECOGNIZED THAT THE FOLLOWING DISCUSSION OF FEDERAL INCOME TAX
ASPECTS OF AMOUNTS RECEIVED UNDER VARIABLE ANNUITY CONTRACTS IS NOT EXHAUSTIVE,
DOES NOT PURPORT TO COVER ALL SITUATIONS, AND IS NOT INTENDED AS TAX ADVICE. A
QUALIFIED TAX ADVISER ALWAYS SHOULD BE CONSULTED WITH REGARD TO THE APPLICATION
OF LAW TO INDIVIDUAL CIRCUMSTANCES.
The Company intends to make a charge for any effect which the income, assets, or
existence of the Contract, the Variable Account or the Sub-Accounts may have
upon its tax. The Variable Account presently is not subject to tax, but the
Company reserves the right to assess a charge for taxes should the Variable
Account at any time become subject to tax. Any charge for taxes will be assessed
on a fair and equitable basis in order to preserve equity among classes of
Owners and with respect to each separate account as though that separate account
were a separate taxable entity.
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THE VARIABLE ACCOUNT IS CONSIDERED A PART OF AND TAXED WITH THE OPERATIONS OF
THE COMPANY. The Company is taxed as a life insurance company under Subchapter L
of the Code. The Company files a consolidated tax return with its affiliates.
The IRS has issued regulations relating to the diversification requirements for
variable annuity and variable life insurance contracts under Section 817(h) of
the Code. The regulations prescribed by the Treasury Department provide that the
investments of a segregated asset account underlying a variable annuity contract
are adequately diversified if no more than 55% of the value of its assets is
represented by any one investment, no more than 70% by any two investments, no
more than 80% by any three investments, and no more than 90% by any four
investments. Under this section of the Code, if the investments are not
adequately diversified, the Contract will not be treated as an annuity contract
and therefore, the income on the Contract for any taxable year of the Owner,
would be treated as ordinary income received or accrued by the Owner. It is
anticipated that the Funds of the Allmerica Investment Trust, the Portfolios of
Fidelity VIP and the Portfolio of T. Rowe Price in this Contract will comply
with the current diversification requirements. In the event that future IRS
regulations and/or rulings would require Contract modifications in order to
remain in compliance with the diversification standards, the Company will make
reasonable efforts to comply, and it reserves the right to make such changes as
it deems appropriate for that purpose.
In addition, traditionally in order for a variable annuity contract to qualify
for tax deferral, the Company, and not the variable contract owner, must be
considered to be the owner for tax purposes of the assets in the segregated
asset account underlying the variable annuity contract. In certain
circumstances, however, variable annuity contract owners may now be considered
the owners of these assets for federal income tax purposes. Specifically, the
IRS has stated in published rulings that a variable annuity contract owner may
be considered the owner of segregated account assets if the contract owner
possesses incidents of ownership in those assets, such as the ability to
exercise investment control over the assets. The Treasury Department has also
announced, in connection with the issuance of regulations concerning investment
diversification, that those regulations "do not provide guidance governing the
circumstances in which investor control of the investments of a segregated asset
account may cause the investor (i.e., the contract owner), rather than the
insurance company, to be treated as the owner of the assets in the account."
This announcement also states that guidance would be issued by way of
regulations or rulings on the "extent to which policyholders may direct their
investments to particular sub-accounts without being treated as owners of the
underlying assets." As of the date of this Prospectus, no such guidance has been
issued. The Company therefore additionally reserves the right to modify the
Contract as necessary in order to attempt to prevent a contract owner from being
considered the owner of a pro rata share of the assets of the segregated asset
account underlying the variable annuity contracts.
A. QUALIFIED AND NON-QUALIFIED CONTRACTS.
From a federal tax viewpoint there are two types of variable annuity contracts,
"qualified" contracts and "non-qualified" contracts. A qualified contract is one
that is purchased in connection with a retirement plan which meets the
requirements of Sections 401, 403, or 408 of the Code, while a non-qualified
contract is one that is not purchased in connection with one of the indicated
retirement plans. The tax treatment for certain withdrawals or surrenders will
vary, depending on whether they are made from a qualified contract or a non-
qualified contract. For more information on the tax provisions applicable to
qualified contracts, see D. below.
B. TAXATION OF THE CONTRACT IN GENERAL.
The Company believes that the Contracts described in this Prospectus will, with
certain exceptions (see "Nonnatural Owner" below), be considered annuity
contracts under Section 72 of the Code. Please note, however, if the Owner
chooses an Annuity Date beyond the Owner's 85th birthday, it is possible that
the Contract may not be considered an annuity for tax purposes, and therefore,
Owner will be taxed on the annual
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increase in the Accumulated Value. The Owner should consult tax and financial
advisors for more information. This section governs the taxation of annuities.
The following discussion concerns annuities subject to Section 72.
WITHDRAWALS PRIOR TO ANNUITIZATION. With certain exceptions, any increase in
the Contract's Accumulated Value is not taxable to the Owner until it is
withdrawn from the Contract. If the Contract is surrendered or amounts are
withdrawn prior to the Annuity Date, any withdrawal of investment gain in value
over the cost basis of the Contract will be taxed as ordinary income. Under the
current provisions of the Code, amounts received under an annuity contract prior
to annuitization (including payments made upon the death of the annuitant or
owner), generally are first attributable to any investment gains credited to the
contract over the taxpayer's "investment in the contract." Such amounts will be
treated as gross income subject to federal income taxation. "Investment in the
contract" is the total of all payments to the Contract which were not excluded
from the Owner's gross income less any amounts previously withdrawn which were
not included in income. Section 72(e)(11)(A)(ii) requires that all non-qualified
deferred annuity contracts issued by the same insurance company to the same
owner during a single calendar year be treated as one contract in determining
taxable distributions.
ANNUITY PAYOUTS AFTER ANNUITIZATION. When annuity benefit payments are
commenced under the Contract, generally a portion of each payment may be
excluded from gross income. The excludable portion generally is determined by a
formula that establishes the ratio that the investment in the Contract bears to
the expected return under the Contract. The portion of the payment in excess of
this excludable amount is taxable as ordinary income. Once all the investment in
the Contract is recovered, the entire payment is taxable to the Owner, whether
or not the Owner is receiving the payments. If an Owner dies before cost basis
is recovered, a deduction for the difference is allowed on the Owner's final tax
return.
PENALTY ON DISTRIBUTION. A 10% penalty tax may be imposed on the withdrawal of
investment gains if the withdrawal is made prior to age 59 1/2. The penalty tax
will not be imposed on withdrawals taken on or after age 59 1/2, or if the
withdrawal follows the death of an Owner (or, if the Owner is not an individual,
the death of the primary Annuitant, as defined in the Code) or, in the case of
the Owner's "total disability" (as defined in the Code). Furthermore, under
Section 72 of the Code, this penalty tax will not be imposed, irrespective of
age, if the amount received is one of a series of "substantially equal" periodic
payments made at least annually for the life or life expectancy of the Owner.
This requirement is met when the Owner elects to have distributions made over
the Owner's life expectancy, or over the joint life expectancy of the Owner and
beneficiary. The requirement that the amount be paid out as one of a series of
"substantially equal" periodic payments is met when the number of units
withdrawn to make each distribution is substantially the same. Any modification,
other than by reason of death or disability, of distributions which are part of
a series of substantially equal periodic payments that occurs before the Owner's
age 59 1/2 or five years, will subject the Owner to the 10% penalty tax on the
prior distributions. In addition to the exceptions above, the penalty tax will
not apply to withdrawals from a qualified Contract made to an employee who has
terminated employment after reaching age 55.
In a Private Letter Ruling, the IRS took the position that where distributions
from a variable annuity contract were determined by amortizing the accumulated
value of the contract over the taxpayer's remaining life expectancy (such as
under the contract's LED option), and the option could be changed or terminated
at any time, the distributions failed to qualify as part of a "series of
substantially equal payments" within the meaning of Section 72 of the Code. The
distributions, therefore, were subject to the 10% federal penalty tax. This
Private Letter Ruling may be applicable to an Owner who receives distributions
under any LED-type option prior to age 59 1/2. subsequent Private Letter
Rulings, however, have treated LED-type withdrawal programs as effectively
avoiding the 10% penalty tax. The position of the IRS on this issue is unclear.
ASSIGNMENTS OR TRANSFERS. If the Owner transfers (assigns) the Contract to
another individual as a gift prior to the Annuity Date, the Code provides that
the Owner will incur taxable income at the time of the transfer. An exception is
provided for certain transfers between spouses. The amount of taxable income
upon such taxable
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transfer is equal to any investment gain in value over the Owner's cost basis at
the time of the transfer. The transfer also is subject to federal gift tax
provisions.
NONNATURAL OWNERS. As a general rule, deferred annuity contracts owned by
"nonnatural persons" (e.g., a corporation) are not treated as annuity contracts
for federal tax purposes, and the investment income attributable to
contributions made after February 28, 1986 is taxed as ordinary income that is
received or accrued by the owner during the taxable year. This rule does not
apply to annuity contracts purchased with a single payment when the annuity date
is no later than a year from the issue date or to deferred annuities owned by
qualified employer plans, estates, employers with respect to a terminated
pension plan, and entities other than employers, such as a trust, holding an
annuity as an agent for a natural person. This exception, however, will not
apply in cases of any employer who is the owner of an annuity contract under a
non-qualified deferred compensation plan.
DEFERRED COMPENSATION PLANS OF STATE AND LOCAL GOVERNMENTS AND TAX-EXEMPT
ORGANIZATIONS. Under Section 457 of the Code, deferred compensation plans
established by governmental and certain other tax-exempt employers for their
employees may invest in annuity contracts. Contributions and investment earnings
are not taxable to employees until distributed; however, with respect to
payments made after February 28, 1986, a Contract owned by a state or local
government or a tax-exempt organization will not be treated as an annuity under
Section 72 as well. In addition, plan assets are treated as property of the
employer, and are subject to the claims of the employer's general creditors.
C. TAX WITHHOLDING.
The Code requires withholding with respect to payments or distributions from
non-qualified contracts and IRAs, unless a taxpayer elects not to have
withholding. A 20% withholding requirement applies to distributions from most
other qualified contracts. In addition, the Code requires reporting to the IRS
of the amount of income received with respect to payment or distributions from
annuities.
The tax treatment of certain withdrawals or surrenders of the non-qualified
Contracts offered by this Prospectus will vary according to whether the amount
withdrawn or surrendered is allocable to an investment in the Contract made
before or after certain dates.
D. PROVISIONS APPLICABLE TO QUALIFIED EMPLOYER PLANS.
The tax rules applicable to qualified retirement plans, as defined by the Code,
are complex and vary according to the type of plan. Benefits under a qualified
plan may be subject to that plan's terms and conditions irrespective of the
terms and conditions of any annuity contract used to fund such benefits. As
such, the following is simply a general description of various types of
qualified plans that may use the Contract. Before purchasing any annuity
contract for use in funding a qualified plan, more specific information should
be obtained.
Qualified Contracts may include special provisions (endorsements) changing or
restricting rights and benefits otherwise available to owners of non-qualified
Contracts. Individuals purchasing a qualified Contract should carefully review
any such changes or limitations which may include restrictions to ownership,
transferability, assignability, contributions, and distributions.
CORPORATE AND SELF-EMPLOYED ("H.R. 10" AND "KEOGH") PENSION AND PROFIT SHARING
PLANS. Sections 401(a), 401(k) and 403(a) of the Code permit business employers
and certain associations to establish various types of tax-favored retirement
plans for employees. The Self-Employed Individuals' Tax Retirement Act of 1962,
as amended, permits self-employed individuals to establish similar plans for
themselves and their employees. Employers intending to use qualified Contracts
in connection with such plans should seek competent advice as to the suitability
of the Contract to their specific needs and as to applicable Code limitations
and tax consequences.
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The Company can provide prototype plans for certain pension or profit sharing
plans for review by the plan's legal counsel. For information, ask your
financial representative.
INDIVIDUAL RETIREMENT ANNUITIES. Section 408 of the Code permits eligible
individuals to contribute to an individual retirement program known as an
Individual Retirement Annuity ("IRA"). Note: This term covers all IRAs permitted
under Section 408(b) of the Code, including Roth IRAs. IRAs are subject to
limits on the amounts that may be contributed, the persons who may be eligible,
and on the time when distributions may commence. In addition, certain
distributions from other types of retirement plans may be "rolled over," on a
tax-deferred basis, to an IRA. Purchasers of an IRA Contract will be provided
with supplementary information as may be required by the IRS or other
appropriate agency, and will have the right to cancel the Contract as described
in this Prospectus. See "B. Right to Cancel Individual Retirement Annuity."
Eligible employers that meet specified criteria may establish simplified
employee pension plans (SEP-IRAs) or SIMPLE IRA plans for their employees using
IRAs. Employer contributions that may be made to such plans are larger than the
amounts that may be contributed to regular IRAs and may be deductible to the
employer.
TAX-SHELTERED ANNUITIES ("TSAS"). Under the provisions of Section 403(b) of the
Code, payments made to annuity Contracts purchased for employees under annuity
plans adopted by public school systems and certain organizations which are tax
exempt under Section 501(c)(3) of the Code are excludable from the gross income
of such employees to the extent that total annual payments do not exceed the
maximum contribution permitted under the Code. Purchasers of TSA contracts
should seek competent advice as to eligibility, limitations on permissible
payments and other tax consequences associated with the contracts.
Withdrawals or other distributions attributable to salary reduction
contributions (including earnings thereon) made to a TSA contract after December
31, 1988, may not begin before the employee attains age 59 1/2, separates from
service, dies or becomes disabled. In the case of hardship, an Owner may
withdraw amounts contributed by salary reduction, but not the earnings on such
amounts. Even though a distribution may be permitted under these rules (e.g.,
for hardship or after separation from service), it may be subject to a 10%
penalty tax as a premature distribution, in addition to income tax.
TEXAS OPTIONAL RETIREMENT PROGRAM. Distributions under a TSA contract issued to
participants in the Texas Optional Retirement Program may not be received except
in the case of the participant's death, retirement or termination of employment
in the Texas public institutions of higher education. These additional
restrictions are imposed under the Texas Government Code and a prior opinion of
the Texas Attorney General.
STATEMENTS AND REPORTS
An Owner is sent a report semi-annually which provides certain financial
information about the Underlying Funds. At least annually, but possibly as
frequent as quarterly, the Company will furnish a statement to the Owner
containing information about his or her Contract, including Accumulation Unit
Values and other information as required by applicable law, rules and
regulations. The Company will also send a confirmation statement to Owners each
time a transaction is made affecting the Contract Value. (Certain transactions
made under recurring payment plans such as Dollar Cost Averaging may in the
future be confirmed quarterly rather than by immediate confirmations.) The Owner
should review the information in all statements carefully. All errors or
corrections must be reported to the Company immediately to assure proper
crediting to the Contract. The Company will assume that all transactions are
accurately reported on confirmation statements and quarterly/annual statements
unless the Owner notifies the Principal Office in writing within 30 days after
receipt of the statement.
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LOANS (QUALIFIED CONTRACTS ONLY)
Loans are available to Owners of TSA Contracts (i.e., contracts issued under
Section 403(b) of the Code) and to Contracts issued to plans qualified under
Sections 401(a) and 401(k) of the Code. Loans are subject to provisions of the
Code and to applicable qualified retirement plan rules. Tax advisors and plan
fiduciaries should be consulted prior to exercising loan privileges.
Loaned amounts will be withdrawn first from Sub-Account and Fixed Account values
on a pro-rata basis until exhausted. Thereafter, any additional amounts will be
withdrawn from the Guarantee Period Accounts (pro-rata by duration and LIFO
within each duration), subject to any applicable Market Value Adjustments. The
maximum loan amount will be determined under the Company's maximum loan formula.
The minimum loan amount is $1,000. Loans will be secured by a security interest
in the Contract and the amount borrowed will be transferred to a loan asset
account within the Company's General Account, where it will accrue interest at a
specified rate below the then-current loan rate. Generally, loans must be repaid
within five years or less, and repayments must be made quarterly and in
substantially equal amounts. Repayments will be allocated pro-rata in accordance
with the most recent payment allocation, except that any allocations to a
Guarantee Period Account will instead be allocated to the Money Market Fund.
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS
The Company reserves the right, subject to applicable law, to make additions to,
deletions from, or substitutions for the shares that are held in the
Sub-Accounts or that the Sub-Accounts may purchase. If the shares of any
Underlying Fund no longer are available for investment or if, in the Company's
judgment, further investment in any Underlying Fund should become inappropriate
in view of the purposes of the Variable Account or the affected Sub-Account, the
Company may withdraw the shares of that Underlying Fund and substitute shares of
another registered open-end management company. The Company will not substitute
any shares attributable to a Contract interest in a Sub-Account without notice
to the Owner and prior approval of the SEC and state insurance authorities, to
the extent required by the 1940 Act or other applicable law. The Variable
Account may, to the extent permitted by law, purchase other securities for other
contracts or permit a conversion between contracts upon request by an Owner.
The Company also reserves the right to establish additional Sub-Accounts of the
Variable Account, each of which would invest in shares corresponding to a new
Underlying Fund or in shares of another investment company having a specified
investment objective. Subject to applicable law and any required SEC approval,
the Company may, in its sole discretion, establish new Sub-Accounts or eliminate
one or more Sub-Accounts if marketing needs, tax considerations or investment
conditions warrant. Any new Sub-Accounts may be made available to existing
Owners on a basis to be determined by the Company.
Shares of the Underlying Funds also are issued to variable accounts of the
Company and its affiliates which issue variable life contracts ("mixed
funding"). Shares of the Portfolios also are issued to other unaffiliated
insurance companies ("shared funding"). It is conceivable that in the future
such mixed funding or shared funding may be disadvantageous for variable life
owners or variable annuity owners. Although the Company, the Trust, Fidelity VIP
and T. Rowe Price do not currently foresee any such disadvantages to either
variable life insurance owners or variable annuity owners, the Company and the
respective trustees intend to monitor events in order to identify any material
conflicts between such owners, and to determine what action, if any, should be
taken in response thereto. If the trustees were to conclude that separate funds
should be established for variable life and variable annuity separate accounts,
the Company will bear the attendant expenses.
If any of these substitutions or changes are made, the Company may endorse the
Contract to reflect the substitution or change, and will notify Owners of all
such changes. If the Company deems it to be in the best interest of Owners, and
subject to any approvals that may be required under applicable law, the Variable
Account or any Sub-Account(s) may be operated as a management company under the
1940 Act, may be
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deregistered under the 1940 Act if registration is no longer required, or may be
combined with other Sub-Accounts or other separate accounts of the Company.
The Company reserves the right, subject to compliance with applicable law, to
(1) transfer assets from the Variable Account or any of its Sub-Accounts to
another of the Company's separate accounts or sub-accounts having assets of the
same class, (2) to operate the Variable Account or any Sub-Account as a
management investment company under the 1940 Act or in any other form permitted
by law, (3) to deregister the Variable Account under the 1940 Act in accordance
with the requirements of the 1940 Act, (4) to substitute the shares of any other
registered investment company for the Underlying Fund shares held by a
Sub-Account, in the event that Underlying Fund shares are unavailable for
investment, or if the Company determines that further investment in such
Underlying Fund shares is inappropriate in view of the purpose of the
Sub-Account, (5) to change the methodology for determining the net investment
factor, and (6) to change the names of the Variable Account or of the
Sub-Accounts. In no event will the changes described above be made without
notice to Owners in accordance with the 1940 Act.
CHANGES TO COMPLY WITH LAW AND AMENDMENTS
The Company reserves the right, without the consent of Owners, to suspend sales
of the Contract as presently offered. The Company also reserves the right to
make any change to provisions of the Contract to comply with, or give Owners the
benefit of, any federal or state statute, rule or regulation, including but not
limited to requirements for annuity contracts and retirement plans under the
Code. Any such changes will apply uniformly to all Contracts that are affected.
You will be given written notice of such changes.
VOTING RIGHTS
The Company will vote Underlying Fund shares held by each Sub-Account in
accordance with instructions received from Owners. Each person having a voting
interest in a Sub-Account will be provided with proxy materials of the
Underlying Fund, together with a form with which to give voting instructions to
the Company. Shares for which no timely instructions are received will be voted
in proportion to the instructions which are received. The Company also will vote
shares in a Sub-Account that it owns and which are not attributable to Contracts
in the same proportion. If the 1940 Act or any rules thereunder should be
amended or if the present interpretation of the 1940 Act or such rules should
change, and as a result the Company determines that it is permitted to vote
shares in its own right (whether or not such shares are attributable to the
Contract) the Company reserves the right to do so.
The number of votes which an Owner may cast will be determined by the Company as
of the record date established by the Underlying Fund. During the accumulation
period, the number of Underlying Fund shares attributable to each Owner will be
determined by dividing the dollar value of the Accumulation Units of the
Sub-Account credited to the Contract by the net asset value of one Underlying
Fund share. During the annuity period, the number of Underlying Fund shares
attributable to each Owner will be determined by dividing the reserve held in
each Sub-Account for the Owner's Variable Annuity by the net asset value of one
Underlying Fund share. Ordinarily, the Owner's voting interest in the Underlying
Fund will decrease as the reserve for the Variable Annuity is depleted.
DISTRIBUTION
The Contract offered by this Prospectus may be purchased from certain
independent broker-dealers which are registered under the Securities and
Exchange Act of 1934 Act and members of the National Association of Securities
Dealers, Inc. ("NASD"). The Contract also is offered through Allmerica
Investments, Inc., which is the principal underwriter and distributor of the
Contracts. Allmerica Investments, Inc., 440 Lincoln Street, Worcester, MA 01653,
is a registered broker-dealer, a member of the NASD and an indirectly wholly
owned subsidiary of First Allmerica.
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The Company pays commissions not to exceed 1.0% of payments to broker-dealers
which sell the Contract, plus ongoing annual compensation of up to 1.0% of
Contract value. To the extent permitted by NASD rules, promotional incentives or
payments also may be provided to such broker-dealers based on sales volumes, the
assumption of wholesaling functions, or other sales-related criteria. Additional
payments may be made for other services not directly related to the sale of the
Contract, including the recruitment and training of personnel, production of
promotional literature, and similar services.
Owners may direct any inquiries to their financial representative or to
Allmerica Investments, Inc., 440 Lincoln Street, Worcester, MA 01653, telephone
1-800-366-1492.
SERVICES
The Company receives fees from the investment advisers or other service
providers of certain Underlying Funds in return for providing certain services
to Owners. Currently, the Company receives service fees with respect to the
Fidelity VIP Equity-Income Portfolio, Fidelity VIP Growth Portfolio, and
Fidelity VIP High Income Portfolio, at an annual rate of 0.10% of the aggregate
net asset value, respectively, of the shares of such Underlying Funds held by
the Variable Account. With respect to the T. Rowe Price International Stock
Portfolio, the Company receives service fees at an annual rate of 0.15% per
annum of the aggregate net asset value of shares held by the Variable Account.
The Company may in the future render services for which it will receive
compensation from the investment advisers or other service providers of other
Underlying Funds.
LEGAL MATTERS
There are no legal proceedings pending to which the Variable Account is a party,
or to which the assets of the Variable Account are subject. The Company and the
Principal Underwriter are not involved in any litigation that is of material
importance in relation to their total assets or that relates to the Variable
Account.
YEAR 2000 COMPLIANCE
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices or
engage in similar normal business activities.
Based on a third party assessment, the Company determined that significant
portions of its software required modification or replacement to enable its
computer systems to properly process dates beyond December 31, 1999. The Company
is presently completing the process of modifying or replacing existing software
and believes that this action will resolve the Year 2000 issue. However, if such
modifications and conversions are not made, or are not completed timely, or
should there be serious unanticipated interruptions from unknown sources, the
Year 2000 issue could have a material adverse impact on the operations of the
Company. Specifically, the Company could experience, among other things, an
interruption in its ability to collect and process premiums, process claim
payments, safeguard and manage its invested assets, accurately maintain
policyholder information, accurately maintain accounting records, and perform
customer service. Any of these specific events, depending on duration, could
have a material adverse impact on the results of operations and the financial
position of the Company.
The Company has initiated formal communications with all of its suppliers to
determine the extent to which the Company is vulnerable to those third parties'
failure to remediate their own Year 2000 issue. The Company's total Year 2000
project cost and estimates to complete the project include the estimated costs
and time associated with the Company's involvement on a third party's Year 2000
issue, and are based on presently available information. However, there can be
no guarantee that the systems of other companies on which the Company's systems
rely will be timely converted, or that a failure to convert by another company,
or a
48
<PAGE>
conversion that is incompatible with the Company's systems, would not have
material adverse effect on the Company. The Company does not believe that it has
material exposure to contingencies related to the Year 2000 issue for the
products it has sold. Although the Company does not believe that there is a
material contingency associated with the Year 2000 project, there can be no
assurance that exposure for material contingencies will not arise.
The cost of the Year 2000 project will be expensed as incurred and is being
funded primarily through a reallocation of resources from discretionary projects
and a reduction in systems maintenance and support costs. Therefore, the Year
2000 project is not expected to result in any significant incremental technology
cost and is not expected to have a material effect on the results of operations.
The Company and its affiliates have incurred and expensed approximately $54
million related to the assessment, plan development and substantial completion
of the Year 2000 project, through December 31, 1998. The total remaining cost of
the project is estimated between $20-30 million.
FURTHER INFORMATION
A Registration Statement under the 1933 Act relating to this offering has been
filed with the SEC. Certain portions of the Registration Statement and
amendments have been omitted in this Prospectus pursuant to the rules and
regulations of the SEC. The omitted information may be obtained from the SEC's
principal office in Washington, D.C., upon payment of the SEC's prescribed fees.
49
<PAGE>
APPENDIX A
MORE INFORMATION ABOUT THE FIXED ACCOUNT
Because of exemption and exclusionary provisions in the securities laws,
interests in the Fixed Account generally are not subject to regulation under the
provisions of the 1933 Act or the 1940 Act. Disclosures regarding the fixed
portion of the annuity Contract and the Fixed Account may be subject to the
provisions of the 1933 Act concerning the accuracy and completeness of
statements made in this Prospectus. The disclosures in this APPENDIX A have not
been reviewed by the SEC.
The Fixed Account is part of the Company's General Account which is made up of
all of the general assets of the Company other than those allocated to a
separate account. Allocations to the Fixed Account become part of the assets of
the Company and are used to support insurance and annuity obligations. A portion
or all of net payments may be allocated to accumulate at a fixed rate of
interest in the Fixed Account. Such net amounts are guaranteed by the Company as
to principal and a minimum rate of interest. Under the Contract, the minimum
interest which may be credited on amounts allocated to the Fixed Account is 3%
compounded annually. Additional "Excess Interest" may or may not be credited at
the sole discretion of the Company.
If an allocation designated as a Fixed Account allocation is received at the
Principal Office during a period when the Fixed Account is not available due to
the limitations outlined above, the monies will be allocated to the Money Market
Fund.
To the extent permitted by state law, the Company reserves the right, from time
to time, to credit an enhanced interest rate to certain initial and/or
subsequent payments ("eligible payments") which are deposited into the Fixed
Account under an Automatic Transfer Option (Dollar Cost Averaging election) that
uses the Fixed Account as the source account from which automatic transfers are
then processed. The following are not considered eligible payments: amounts
transferred into the Fixed Account from the Variable Account and/or the
Guarantee Period Accounts; amounts already in the Fixed Account at the time an
eligible payment is deposited and amounts transferred to the Contract from
another annuity contract issued by the Company. The Company reserves the right
to extend the period of time that the enhanced rate will apply. For more
information, contact your financial representative or call 1-800-366-1492.
A-1
<PAGE>
APPENDIX B
PERFORMANCE TABLES
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
TABLE 1A
AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF SUB-ACCOUNT
<TABLE>
<CAPTION>
SINCE
SUB-ACCOUNT FOR YEAR INCEPTION
INCEPTION ENDED OF
SUB-ACCOUNT INVESTING IN UNDERLYING FUND DATE 12/31/98 5 YEARS SUB-ACCOUNT
<S> <C> <C> <C> <C>
Select Emerging Markets Fund................. 2/20/98 N/A N/A -22.65%
Select International Equity Fund............. 5/3/94 14.62% N/A 10.48%
T. Rowe Price International Stock Portfolio.. 5/1/95 14.00% N/A 9.31%
Select Aggressive Growth Fund................ 9/8/92 8.78% 13.16% 16.36%
Select Capital Appreciation Fund............. 4/30/95 12.05% N/A 18.47%
Select Value Opportunity Fund................ 2/20/98 N/A N/A -1.37%
Select Growth Fund........................... 9/8/92 33.32% 20.21% 17.42%
Select Strategic Growth Fund................. 2/20/98 N/A N/A -3.88%
Fidelity VIP Growth Portfolio................ 5/1/95 37.31% N/A 25.83%
Select Growth and Income Fund................ 9/8/92 14.57% 15.95% 13.79%
Fidelity VIP Equity-Income Portfolio......... 5/1/95 9.83% N/A 18.30%
Fidelity VIP High Income Portfolio........... 5/1/95 -5.90% N/A 8.27%
Select Income Fund........................... 9/8/92 5.10% 4.33% 4.87%
Money Market Fund............................ 10/8/92 3.80% 3.51% 3.08%
</TABLE>
TABLE 2A
AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF UNDERLYING FUND
<TABLE>
<CAPTION>
SINCE
UNDERLYING INCEPTION
FUND FOR YEAR OF
INCEPTION ENDED UNDERLYING
SUB-ACCOUNT INVESTING IN UNDERLYING FUND DATE 12/31/98 5 YEARS FUND
<S> <C> <C> <C> <C>
Select Emerging Markets Fund................. 2/20/98 N/A N/A -22.65%
Select International Equity Fund............. 5/2/94 14.62% N/A 10.47%
T. Rowe Price International Stock
Portfolio................................... 3/31/94 14.00% N/A 7.88%
Select Aggressive Growth Fund................ 8/21/92 8.78% 13.16% 16.20%
Select Capital Appreciation Fund............. 4/28/95 12.05% N/A 18.44%
Select Value Opportunity Fund................ 4/30/93 3.17% 11.28% 12.88%
Select Growth Fund........................... 8/21/92 33.32% 20.21% 17.26%
Select Strategic Growth Fund................. 2/20/98 N/A N/A -3.88%
Fidelity VIP Growth Portfolio................ 10/9/86 37.31% 19.81% 17.51%
Select Growth and Income Fund................ 8/21/92 14.57% 15.95% 13.78%
Fidelity VIP Equity-Income Portfolio......... 10/9/86 9.83% 16.88% 13.87%
Fidelity VIP High Income Portfolio........... 9/19/85 -5.90% 7.04% 9.29%
Select Income Fund........................... 8/21/92 5.10% 4.33% 4.81%
Money Market Fund............................ 4/29/85 3.80% 3.51% 3.91%
</TABLE>
B-1
<PAGE>
APPENDIX C
PERFORMANCE TABLES
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
TABLE 1A
AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF SUB-ACCOUNT
<TABLE>
<CAPTION>
SINCE
SUB-ACCOUNT FOR YEAR INCEPTION
INCEPTION ENDED OF
SUB-ACCOUNT INVESTING IN UNDERLYING FUND DATE 12/31/98 5 YEARS SUB-ACCOUNT
<S> <C> <C> <C> <C>
Select Emerging Markets Fund................. 2/20/98 N/A N/A -22.61%
Select International Equity Fund............. 5/3/94 14.66% N/A 10.51%
T. Rowe Price International Stock Portfolio.. 8/28/95 14.04% N/A 9.34%
Select Aggressive Growth Fund................ 8/28/95 8.82% N/A 15.04%
Select Capital Appreciation Fund............. 4/30/95 12.14% N/A 18.51%
Select Value Opportunity Fund................ 9/17/95 3.19% N/A -1.33%
Select Growth Fund........................... 8/28/95 33.36% N/A 23.31%
Select Strategic Growth Fund................. 2/20/98 N/A N/A -3.84%
Fidelity VIP Growth Portfolio................ 8/28/95 37.35% N/A 25.87%
Select Growth and Income Fund................ 9/10/95 14.61% N/A 18.02%
Fidelity VIP Equity-Income Portfolio......... 8/28/95 9.87% N/A 18.34%
Fidelity VIP High Income Portfolio........... 12/4/95 -5.86% N/A 8.31%
Select Income Fund........................... 9/11/98 N/A N/A 5.96%
Money Market Fund............................ 11/20/95 3.83% N/A 3.67%
</TABLE>
TABLE 2A
AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF UNDERLYING FUND
<TABLE>
<CAPTION>
UNDERLYING SINCE
FUND FOR YEAR INCEPTION OF
INCEPTION ENDED UNDERLYING
SUB-ACCOUNT INVESTING IN UNDERLYING FUND DATE 12/31/98 5 YEARS FUND
<S> <C> <C> <C> <C>
Select Emerging Markets Fund................. 2/20/98 N/A N/A -22.61%
Select International Equity Fund............. 5/2/94 14.66% N/A 10.51%
T. Rowe Price International Stock
Portfolio................................... 3/31/94 14.04% N/A 7.92%
Select Aggressive Growth Fund................ 8/21/92 8.82% 13.20% 16.25%
Select Capital Appreciation Fund............. 4/28/95 12.14% N/A 18.48%
Select Value Opportunity Fund................ 4/30/93 3.19% 11.32% 12.92%
Select Growth Fund........................... 8/21/92 33.36% 20.25% 17.31%
Select Strategic Growth Fund................. 2/20/98 N/A N/A -3.84%
Fidelity VIP Growth Portfolio................ 10/9/86 37.35% 19.85% 17.55%
Select Growth and Income Fund................ 8/21/92 14.61% 15.99% 13.71%
Fidelity VIP Equity-Income Portfolio......... 10/9/86 9.87% 16.92% 13.91%
Fidelity VIP High Income Portfolio........... 9/19/85 -5.86% 7.08% 9.33%
Select Income Fund........................... 8/21/92 5.14% 4.37% 4.87%
Money Market Fund............................ 4/29/85 3.83% 3.55% 3.95%
</TABLE>
C-1
<PAGE>
APPENDIX D
THE MARKET VALUE ADJUSTMENT
MARKET VALUE ADJUSTMENT -- The following are examples of how the Market Value
Adjustment works:
The market value factor is: [(1+i)/(1+j)](n/365) - 1
The following examples assume:
1. The payment was allocated to a ten-year Guarantee Period Account with a
Guaranteed Interest Rate of 8%.
2. The date of surrender is seven years (2,555 days) from the expiration
date.
3. The value of the Guarantee Period Account is equal to $62,985.60 at the
end of three years.
4. No transfers or withdrawals affecting this Guarantee Period Account have
been made.
NEGATIVE MARKET VALUE ADJUSTMENT (UNCAPPED)
Assume that on the date of surrender, the current rate (j) is 10.00% or 0.10
<TABLE>
<C> <C> <S>
The market value factor = [(1+i)/(1+j)(n/365) - 1
= [(1+.08)/(1+.10)(2555/365) - 1
= (.98182)(7) - 1
= -.12054
The market value = The market value factor multiplied by the withdrawal
adjustment
= -.12054 X $62,985.60
= -$7,592.11
</TABLE>
POSITIVE MARKET VALUE ADJUSTMENT (UNCAPPED)
Assume that on the date of surrender, the current rate (j) is 7.00% or 0.07
<TABLE>
<C> <C> <S>
The market value factor = [(1+i)/(1+j)(n/365) - 1
= [(1+.08)/(1+.07)(2555/365) - 1
= (1.0093)(7) - 1
= .06694
The market value = The market value factor multiplied by the withdrawal
adjustment
= .06694 X $62,985.60
= $4,216.26
</TABLE>
D-1
<PAGE>
NEGATIVE MARKET VALUE ADJUSTMENT (CAPPED)
Assume that on the date of surrender, the current rate (j) is 11.00% or 0.11
<TABLE>
<C> <C> <S>
The market value factor = [(1+i)/(1+j)](n/365) - 1
= [(1+.08)/(1+.11)(2555/365) - 1
= (.97297)(7) - 1
= -.17454
The market value = Minimum of the market value factor multiplied by the
adjustment withdrawal or the negative of the excess interest earned over
3%
= Minimum of (-.17454 X $62,985.60 or - $8,349.25)
= Minimum of (- $10,993.51 or - $8,349.25)
= - $8,349.25
</TABLE>
POSITIVE MARKET VALUE ADJUSTMENT (CAPPED)
Assume that on the date of surrender, the current rate (j) is 6.00% or 0.06
<TABLE>
<C> <C> <S>
The market value factor = [(1+i)/(1+j)(n/365) - 1
= [(1+.08)/(1+.06) (2555/365) - 1
= (1.01887)(7) - 1
= .13981
The market value = Minimum of the market value factor multiplied by the
adjustment withdrawal or the excess interest earned over 3%
= Minimum of (.13981 X $62,985.60 or $8,349.25)
= Minimum of ($8,806.02 or $8,349.25)
= $8,349.25
</TABLE>
D-2
<PAGE>
APPENDIX E
CONDENSED FINANCIAL INFORMATION
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
ALLMERICA SELECT SEPARATE ACCOUNT
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
SELECT EMERGING MARKETS
Unit Value:
Beginning of Period................... 0.000 N/A N/A N/A N/A N/A N/A
End of Period......................... 0.776 N/A N/A N/A N/A N/A N/A
Units Outstanding at End of Period
(in thousands)......................... 5,209 N/A N/A N/A N/A N/A N/A
SELECT INTERNATIONAL EQUITY
Unit Value:
Beginning of Period................... 1.400 1.357 1.128 0.956 1.000 N/A N/A
End of Period......................... 1.608 1.400 1.357 1.128 0.956 N/A N/A
Units Outstanding at End of Period
(in thousands)......................... 103,028 93,170 60,304 35,558 22,183 N/A N/A
T. ROWE PRICE INTERNATIONAL STOCK
Unit Value:
Beginning of Period................... 1.223 1.203 1.065 1.000 N/A N/A N/A
End of Period......................... 1.398 1.223 1.203 1.065 N/A N/A N/A
Units Outstanding at End of Period
(in thousands)......................... 41,458 33,977 16,510 4,066 N/A N/A N/A
SELECT AGGRESSIVE GROWTH
Unit Value:
Beginning of Period................... 2.419 2.066 1.768 1.354 1.405 1.192 1.192
End of Period......................... 2.637 2.419 2.066 1.768 1.354 1.405 1.192
Units Outstanding at End of Period
(in thousands)......................... 86,699 81,233 64,262 51,006 36,330 17,538 5,123
SELECT CAPITAL APPRECIATION
Unit Value:
Beginning of Period................... 1.672 1.484 1.383 1.000 N/A N/A N/A
End of Period......................... 1.878 1.672 1.484 1.383 N/A N/A N/A
Units Outstanding at End of Period
(in thousands)......................... 54,789 43,733 24,257 5,424 N/A N/A N/A
SELECT VALUE OPPORTUNITY
Unit Value:
Beginning of Period................... 0.000 N/A N/A N/A N/A N/A N/A
End of Period......................... 0.989 N/A N/A N/A N/A N/A N/A
Units Outstanding at End of Period
(in thousands)......................... 18,240 N/A N/A N/A N/A N/A N/A
SELECT GROWTH
Unit Value:
Beginning of Period................... 2.091 1.582 1.315 1.069 1.101 1.104 1.000
End of Period......................... 2.793 2.091 1.582 1.315 1.069 1.101 1.104
Units Outstanding at End of Period
(in thousands)......................... 120,538 98,533 68,193 53,073 38,752 20,366 5,246
</TABLE>
E-1
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
SELECT STRATEGIC GROWTH
Unit Value:
Beginning of Period................... 0.000 N/A N/A N/A N/A N/A N/A
End of Period......................... 0.964 N/A N/A N/A N/A N/A N/A
Units Outstanding at End of Period
(in thousands)......................... 8,709 N/A N/A N/A N/A N/A N/A
FIDELITY VIP GROWTH
Unit Value:
Beginning of Period................... 1.701 1.397 1.235 1.000 N/A N/A N/A
End of Period......................... 2.340 1.701 1.397 1.235 N/A N/A N/A
Units Outstanding at End of Period
(in thousands)......................... 63,055 45,772 24,745 6,677 N/A N/A N/A
SELECT GROWTH AND INCOME
Unit Value:
Beginning of Period................... 1.996 1.652 1.382 1.074 1.082 0.994 1.000
End of Period......................... 2.292 1.996 1.652 1.382 1.074 1.082 0.994
Units Outstanding at End of Period
(in thousands)......................... 129,119 106,800 77,919 61,942 43,292 20,983 22,339
FIDELITY VIP EQUITY-INCOME
Unit Value:
Beginning of Period................... 1.696 1.342 1.191 1.000 N/A N/A N/A
End of Period......................... 1.867 1.696 1.342 1.191 N/A N/A N/A
Units Outstanding at End of Period
(in thousands)......................... 95,537 65,130 31,681 9,213 N/A N/A N/A
FIDELITY VIP HIGH INCOME
Unit Value:
Beginning of Period................... 1.430 1.233 1.096 1.000 N/A N/A N/A
End of Period......................... 1.350 1.430 1.233 1.096 N/A N/A N/A
Units Outstanding at End of Period
(in thousands)......................... 74,986 50,470 23,051 6,714 N/A N/A N/A
SELECT INCOME
Unit Value:
Beginning of Period................... 1.301 1.208 1.186 1.028 1.095 1.001 1.000
End of Period......................... 1.371 1.301 1.208 1.186 1.028 1.095 1.001
Units Outstanding at End of Period
(in thousands)......................... 102,171 72,394 58,751 46,845 32,823 18,320 5,372
MONEY MARKET
Unit Value:
Beginning of Period................... 1.179 1.133 1.091 1.045 1.019 1.003 1.000
End of Period......................... 1.227 1.179 1.133 1.091 1.045 1.019 1.003
Units Outstanding at End of Period
(in thousands)......................... 92,796 65,441 60,691 45,589 31,836 19,802 1,447
</TABLE>
E-2
<PAGE>
CONDENSED FINANCIAL INFORMATION
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
ALLMERICA SELECT SEPARATE ACCOUNT
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
SELECT EMERGING MARKETS
Unit Value:
Beginning of Period................................................ 0.000 N/A N/A N/A N/A
End of Period...................................................... 0.776 N/A N/A N/A N/A
Units Outstanding at End of Period (in thousands).................... 582 N/A N/A N/A N/A
SELECT INTERNATIONAL EQUITY
Unit Value:
Beginning of Period................................................ 1.400 1.356 1.128 0.956 1.000
End of Period...................................................... 1.608 1.400 1.356 1.128 0.956
Units Outstanding at End of Period (in thousands).................... 6,291 5,132 3,481 1,900 695
T. ROWE PRICE INTERNATIONAL STOCK
Unit Value:
Beginning of Period................................................ 1.223 1.203 1.065 1.000 N/A
End of Period...................................................... 1.397 1.223 1.203 1.065 N/A
Units Outstanding at End of Period (in thousands).................... 2,591 1,693 1,170 265 N/A
SELECT AGGRESSIVE GROWTH
Unit Value:
Beginning of Period................................................ 1.786 1.526 1.305 1.044 1.000
End of Period...................................................... 1.948 1.786 1.526 1.305 1.044
Units Outstanding at End of Period (in thousands).................... 6,449 5,305 4,013 2,393 756
SELECT CAPITAL APPRECIATION
Unit Value:
Beginning of Period................................................ 1.672 1.484 1.383 1.000 N/A
End of Period...................................................... 1.878 1.672 1.484 1.383 N/A
Units Outstanding at End of Period (in thousands).................... 2,662 1,914 1,366 391 N/A
SELECT VALUE OPPORTUNITY
Unit Value:
Beginning of Period................................................ 0.000 N/A N/A N/A N/A
End of Period...................................................... 0.989 N/A N/A N/A N/A
Units Outstanding at End of Period (in thousands).................... 1,367 N/A N/A N/A N/A
SELECT GROWTH
Unit Value
Beginning of Period................................................ 2.019 1.527 1.269 1.032 1.000
End of Period...................................................... 2.697 2.019 1.527 1.269 1.032
Units Outstanding at End of Period (in thousands).................... 6,841 5,168 3,534 2,177 756
SELECT STRATEGIC GROWTH
Unit Value:
Beginning of Period................................................ 0.000 N/A N/A N/A N/A
End of Period...................................................... 0.964 N/A N/A N/A N/A
Units Outstanding at End of Period (in thousands).................... 694 N/A N/A N/A N/A
</TABLE>
E-3
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
FIDELITY VIP GROWTH
Unit Value:
Beginning of Period................................................ 1.701 1.397 1.235 1.000 N/A
End of Period...................................................... 2.340 1.701 1.397 1.235 N/A
Units Outstanding at End of Period (in thousands).................... 3,567 2,198 1,326 262 N/A
SELECT GROWTH AND INCOME
Unit Value:
Beginning of Period................................................ 1.913 1.584 1.324 1.030 1.000
End of Period...................................................... 2.197 1.913 1.584 1.324 1.030
Units Outstanding at End of Period (in thousands).................... 9,924 7,897 5,670 3,673 1,724
FIDELITY VIP EQUITY-INCOME
Unit Value:
Beginning of Period................................................ 1.696 1.342 1.191 1.000 N/A
End of Period...................................................... 1.867 1.696 1.342 1.191 N/A
Units Outstanding at End of Period (in thousands).................... 5,779 3,421 1,802 429 N/A
FIDELITY VIP HIGH INCOME
Unit Value:
Beginning of Period................................................ 1.430 1.233 1.096 1.000 N/A
End of Period...................................................... 1.350 1.430 1.233 1.096 N/A
Units Outstanding at End of Period (in thousands).................... 5,261 2,753 1,298 273 N/A
SELECT INCOME
Unit Value:
Beginning of Period................................................ 1.257 1.168 1.146 0.993 1.000
End of Period...................................................... 1.325 1.257 1.168 1.146 0.993
Units Outstanding at End of Period (in thousands).................... 11,009 6,061 4,956 4,114 1,916
MONEY MARKET
Unit Value:
Beginning of Period................................................ 1.151 1.106 1.065 1.020 1.000
End of Period...................................................... 1.197 1.151 1.106 1.065 1.020
Units Outstanding at End of Period (in thousands).................... 8,761 6,157 6,060 4,027 2,085
</TABLE>
E-4
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
STATEMENT OF ADDITIONAL INFORMATION
OF
INDIVIDUAL AND GROUP VARIABLE ANNUITY CONTRACTS FUNDED THROUGH
SUB-ACCOUNTS OF
ALLMERICA SELECT SEPARATE ACCOUNT
This Statement of Additional Information is not a prospectus. It should be
read in conjunction with the Allmerica Select Charter prospectus of Allmerica
Select Separate Account dated May 1, 1999 ("the Prospectus"). The Prospectus
may be obtained from Annuity Client Services, Allmerica Financial Life
Insurance and Annuity Company, 440 Lincoln Street, Worcester, Massachusetts
01653, telephone 1-800-366-1492.
DATED MAY 1, 1999
AFLIAC Select Charter
<PAGE>
TABLE OF CONTENTS
GENERAL INFORMATION AND HISTORY..........................................2
TAXATION OF THE CONTRACT, THE VARIABLE ACCOUNT AND THE
COMPANY................................................................3
SERVICES.................................................................3
UNDERWRITERS.............................................................3
ANNUITY BENEFIT PAYMENTS.................................................4
PERFORMANCE INFORMATION..................................................6
FINANCIAL STATEMENTS.....................................................F-1
GENERAL INFORMATION AND HISTORY
Allmerica Select Separate Account (the "Variable Account") is a separate
investment account of Allmerica Financial Life Insurance and Annuity Company
(the "Company") authorized by vote of its Board of Directors on March 5,
1992.The Company is a life insurance company organized under the laws of
Delaware in July 1974. Its principal office (the "Principal Office") is
located at 440 Lincoln Street, Worcester, Massachusetts 01653, telephone
(508) 855-1000. The Company is subject to the laws of the State of Delaware
governing insurance companies and to regulation by the Commissioner of
Insurance of Delaware. In addition, the Company is subject to the insurance
laws and regulations of other states and jurisdictions in which it is
licensed to operate. As of December 31, 1998, the Company had over $14
billion in assets and over $26 billion of life insurance in force.
Effective October 1, 1995, the Company changed its name from SMA Life
Assurance Company to Allmerica Financial Life Insurance and Annuity Company.
The Company is an indirectly wholly owned subsidiary of First Allmerica
Financial Life Insurance Company ("First Allmerica") which, in turn, is a
wholly owned subsidiary of Allmerica Financial Corporation ("AFC"). First
Allmerica, originally organized under the laws of Massachusetts in 1844 as a
mutual life insurance company, and known as State Mutual Life Assurance
Company of America, converted to a stock life insurance company and adopted
its present name on October 16, 1995. First Allmerica is among the five
oldest life insurance companies in America. As of December 31, 1998, First
Allmerica and its subsidiaries (including the Company) had over $27 billion
in combined assets and over $48 billion in life insurance in force.
Currently, 14 Sub-Accounts of the Variable Account are available under
Contract Form 3027-98 (the "Contract"). Each Sub-Account invests in a
corresponding investment portfolio of Allmerica Investment Trust ("Trust"),
Variable Insurance Products Fund ("Fidelity VIP") or T. Rowe Price
International Series, Inc. ("T. Rowe Price"). The Trust is managed by
Allmerica Financial Investment Management Services, Inc. Fidelity VIP is
managed by Fidelity Management & Research Company ("FMR"). The T. Rowe Price
International Stock Portfolio of T. Rowe Price is managed by Rowe
Price-Fleming International, Inc.
2
<PAGE>
The Trust, Fidelity VIP and T. Rowe Price are open-end, diversified
management investment companies. Ten different funds of the Trust are
available under the Contract: the Select Emerging Markets Fund, Select
International Equity Fund, Select Aggressive Growth Fund, Select Capital
Appreciation Fund, Select Value Opportunity Fund, Select Growth Fund, Select
Strategic Growth Fund, Select Growth and Income Fund, Select Income Fund and
Money Market Fund. Three portfolios of Fidelity VIP are available under the
Contract: the Fidelity VIP High Income Portfolio, Fidelity VIP Equity-Income
Portfolio, and Fidelity VIP Growth Portfolio. One portfolio of T. Rowe Price
is available under the Contract: the T. Rowe Price International Stock
Portfolio. Each Fund and Portfolio available under the Contract (together,
the "Underlying Funds") has its own investment objectives and certain
attendant risks.
TAXATION OF THE CONTRACT, THE VARIABLE
ACCOUNT AND THE COMPANY
The Company currently imposes no charge for taxes payable in connection with
the Contract, other than for state and local premium taxes and similar
assessments when applicable. The Company reserves the right to impose a
charge for any other taxes that may become payable in the future in
connection with the Contract or the Variable Account.
The Variable Account is considered to be a part of and taxed with the
operations of the Company. The Company is taxed as a life insurance company
under subchapter L of the Internal Revenue Code (the "Code"), and files a
consolidated tax return with its parent and affiliated companies.
The Company reserves the right to make a charge for any effect which the
income, assets or existence of the Contract or the Variable Account may have
upon its tax. Such charge for taxes, if any, will be assessed on a fair and
equitable basis in order to preserve equity among classes of Contract Owners
("Owners"). The Variable Account presently is not subject to tax.
SERVICES
CUSTODIAN OF SECURITIES. The Company serves as custodian of the assets of
the Variable Account. Underlying Fund shares owned by the Sub-Accounts are
held on an open account basis. A Sub-Account's ownership of Underlying Fund
shares is reflected on the records of the Underlying Fund and is not
represented by any transferable stock certificates.
EXPERTS. The financial statements of the Company as of December 31, 1998 and
1997 and for each of the three years in the period ended December 31, 1998,
and the financial statements of the Allmerica Select Separate Account of the
Company as of December 31, 1998 and for the periods indicated, included in
this Statement of Additional Information constituting part of this
Registration Statement, have been so included in reliance on the reports of
PricewaterhouseCoopers LLP, independent accountants, given on the authority
of said firm as experts in auditing and accounting.
The financial statements of the Company included herein should be considered
only as bearing on the ability of the Company to meet its obligations under the
Contract.
UNDERWRITERS
Allmerica Investments, Inc. ("Allmerica Investments"), a registered
broker-dealer under the Securities Exchange Act of 1934 and a member of the
National Association of Securities Dealers, Inc.
3
<PAGE>
("NASD"), serves as principal underwriter and general distributor for the
Contract pursuant to a contract with Allmerica Investments, the Company and
the Variable Account. Allmerica Investments distributes the Contract on a
best-efforts basis. Allmerica Investments, Inc., 440 Lincoln Street,
Worcester, Massachusetts 01653, was organized in 1969 as a wholly owned
subsidiary of First Allmerica, and presently is indirectly wholly owned by
First Allmerica.
The Contract offered by this Prospectus is offered continuously, and may be
purchased from certain independent broker-dealers which are NASD members and
whose representatives are authorized by applicable law to sell variable
annuity contracts.
All persons selling the Contract are required to be licensed by their
respective state insurance authorities for the sale of variable annuity
contracts. The Company pays commissions, not to exceed 1.0% of purchase
payments, to entities which sell the Contract. To the extent permitted by
NASD rules, promotional incentives or payments also may be provided to such
entities based on sales volumes, the assumption of wholesaling functions or
other sales-related criteria. Additional payments may be made for other
services not directly related to the sale of the Contract, including the
recruitment and training of personnel, production of promotional literature
and similar services.
Commissions paid by the Company do not result in any charge to Owners or to
the Variable Account in addition to the charges described under "CHARGES AND
DEDUCTIONS" in the Prospectus.
The aggregate amounts of commissions retained by Allmerica Investments for
sales of contracts funded by Allmerica Select Separate Account for the years
1996, 1997 and 1998 were $316.41, $747.30 and $619.00, respectively.
ANNUITY BENEFIT PAYMENTS
The method by which the Accumulated Value under the Contract is determined is
described in detail under "Computation of Values" in the Prospectus.
ILLUSTRATION OF ACCUMULATION UNIT CALCULATION USING HYPOTHETICAL EXAMPLE.
The Accumulation Unit calculation for a daily Valuation Period may be
illustrated by the following hypothetical example: Assume that the assets of
a Sub-Account at the beginning of a one-day Valuation Period were $5,000,000;
that the value of an Accumulation Unit on the previous date was $1.135000;
and that during the Valuation Period, the investment income and net realized
and unrealized capital gains exceed net realized and unrealized capital
losses by $1,675. The Accumulation Unit Value at the end of the current
Valuation Period would be calculated as follows:
(1) Accumulation Unit Value -- Previous Valuation Period.........$ 1.135000
(2) Value of Assets -- Beginning of Valuation Period............$ 5,000,000
(3) Excess of Investment Income and Net Gains Over Capital Losses.....1,675
(4) Adjusted Gross Investment Rate for the Valuation Period (3) divided
by (2).......................................................0.000335
4
<PAGE>
(5) Annual Charge (one-day equivalent of 1.40% per annum...........0.000039
(6) Net Investment Rate (4) - (5)..................................0.000296
(7) Net Investment Factor 1.000000 + (6)...........................1.000296
(8) Accumulation Unit Value -- Current Period (1) x (7)...........$1.135336
Conversely, if unrealized capital losses and charges for expenses and taxes
exceeded investment income and net realized capital gains of $1,675, the
Accumulation Unit Value at the end of the Valuation Period would have been
$1.134576.
The method for determining the amount of annuity benefit payments is
described in detail under "Determination of First and Subsequent Annuity
Benefit Payments" in the Prospectus.
ILLUSTRATION OF VARIABLE ANNUITY BENEFIT PAYMENT CALCULATION USING
HYPOTHETICAL EXAMPLE. The determination of the Annuity Unit value and the
variable annuity benefit payment may be illustrated by the following
hypothetical example: Assume an Annuitant has 40,000 Accumulation Units in a
Variable Account, and that the value of an Accumulation Unit on the Valuation
Date used to determine the amount of the first variable annuity benefit
payment is $1.120000. Therefore, the Accumulation Value of the Contract is
$44,800 (40,000 x $1.120000). Assume also that the Owner elects an option
for which the first monthly payment is $6.57 per $1,000 of Accumulated Value
applied. Assuming no premium tax, the first monthly payment would be $44,800
multiplied by $6.57, or $294.34.
Next, assume that the Annuity Unit Value for the assumed rate of 3.5% per
annum for the Valuation Date as of which the first payment was calculated was
$1.100000. Annuity Unit values will not be the same as Accumulation Unit
values because the former reflect the 3.5% assumed interest rate used in the
annuity rate calculations. When the Annuity Unit value of $1.100000 is
divided into the first monthly payment the number of Annuity Units
represented by that payment is determined to be 267.5818. The value of this
same number of Annuity Units will be paid in each subsequent month under most
options. Assume further that the net investment factor for the Valuation
Period applicable to the next annuity benefit payment is 1.000190.
Multiplying this factor by .999906 (the one-day adjustment factor for the
assumed interest rate of 3.5% per annum) produces a factor of 1.000096. This
then is multiplied by the Annuity Unit value on the immediately preceding
Valuation Date (assumed here to be $1.105000). The result is an Annuity Unit
value of $1.105106 for the current monthly payment. The current monthly
payment then is determined by multiplying the number of Annuity Units by the
current Annuity Unit value, or 267.5818 times $1.105106, which produces a
current monthly payment of $295.71.
METHOD FOR DETERMINING COMMUTED VALUE ON VARIABLE ANNUITY PERIOD CERTAIN
OPTIONS AND ILLUSTRATION USING HYPOTHETICAL EXAMPLE. The Contract offers
both commutable and non-commutable period certain annuity options. A
commutable option gives the Annuitant the right to exchange any remaining
payments for a lump sum payment based on the commuted value. The Commuted
Value is the present value of remaining payments calculated at 3.5% interest.
The determination of the Commuted Value may be illustrated by the following
hypothetical example.
Assume a commutable period certain option is elected. The number of Annuity
Units on which each payment is based would be calculated using the Surrender
Value less any premium tax rather than the
5
<PAGE>
Accumulated Value. Assume this results in 250.0000 Annuity Units. Assume
the Commuted Value is requested with 60 monthly payments remaining and a
current Annuity Unit Value of $1.200000. Based on these assumptions, the
dollar amount of remaining payments would be $300 a month for 60 months. The
present value at 3.5% of all remaining payments would be $16,560.72.
PERFORMANCE INFORMATION
Performance information for a Sub-Account may be compared, in reports and
promotional literature, to certain indices described in the Prospectus under
"PERFORMANCE INFORMATION." In addition, the Company may provide advertising,
sales literature, periodic publications or other material information on
various topics of interest to Owners and prospective Owners. These topics
may include the relationship between sectors of the economy and the economy
as a whole and its effect on various securities markets, investment
strategies and techniques (such as value investing, market timing, dollar
cost averaging, asset allocation, constant ratio transfer and account
rebalancing), the advantages and disadvantages of investing in tax-deferred
and taxable investments, customer profiles and hypothetical purchase and
investment scenarios, financial management and tax and retirement planning,
and investment alternatives to certificates of deposit and other financial
instruments, including comparisons between the Contract and the
characteristics of and market for such financial instruments. Total return
data and supplemental total return information may be advertised based on the
period of time that an Underlying Fund and an underlying Sub-Account have
been in existence, even if longer than the period of time that the Contract
has been offered. The results for any period prior to a Contract being
offered will be calculated as if the Contract had been offered during that
period of time, with all charges assumed to be those applicable to the
Contract.
TOTAL RETURN
"Total Return" refers to the total of the income generated by an investment
in a Sub-Account and of the changes of value of the principal invested (due
to realized and unrealized capital gains or losses) for a specified period,
reduced by the Sub-Account's asset charge.
Total Return figures are calculated by standardized methods prescribed by
rules of the Securities and Exchange Commission (the "SEC"). The quotations
are computed by finding the average annual compounded rates of return over
the specified period that would equate the initial amount invested to the
ending redeemable values, according to the following formula:
(n)
P(1 + T) = ERV
Where: P = a hypothetical initial payment to the Variable Account of $1,000
T = average annual total return
n = number of years
ERV = the ending redeemable value of the $1,000 payment at the end
of the specified period
The calculation of Total Return includes the annual charges against the
assets of the Sub-Account. This charge is 1.40% on an annual basis. The
calculation of ending redeemable value assumes (1) the Contract was issued at
the beginning of the period, and (2) a complete surrender of the Contract at
the end of the period.
6
<PAGE>
The calculations of Total Return include the deduction of the $35 (or lower,
depending on the state of contract issue) annual Contract fee.
YIELD AND EFFECTIVE YIELD - THE MONEY MARKET SUB-ACCOUNT
Set forth below is yield and effective yield information for the Money Market
Sub-Account for the seven-day period ended December 31, 1998:
---------------------------
Yield 3.50%
---------------------------
Effective Yield 3.56%
---------------------------
The yield and effective yield figures are calculated by standardized methods
prescribed by rules of the SEC. Under those methods, the yield quotation is
computed by determining the net change (exclusive of capital changes) in the
value of a hypothetical pre-existing account having a balance of one
accumulation unit of the Sub-Account at the beginning of the period, dividing
the difference by the value of the account at the beginning of the same period
to obtain the base period return, and then multiplying the return for a
seven-day base period by (365/7), with the resulting yield carried to the
nearest hundredth of one percent.
The Money Market Sub-Account computes effective yield by compounding the
unannualized base period return by using the formula:
(365/7)
Effective Yield =[(base period return + 1) ] -- 1
The calculations of yield and effective yield reflect the $35 (or lower,
depending on state of Contract issue) annual Contract fee.
FINANCIAL STATEMENTS
Financial Statements are included for Allmerica Financial Life Insurance and
Annuity Company and for its Allmerica Select Separate Account.
7
<PAGE>
ALLMERICA FINANCIAL
LIFE INSURANCE AND
ANNUITY COMPANY
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
Allmerica Financial Life Insurance and Annuity Company
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, comprehensive income, shareholder's equity
and cash flows present fairly, in all material respects, the financial position
of Allmerica Financial Life Insurance and Annuity Company (the "Company") at
December 31, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PRICEWATERHOUSECOOPERS
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 2, 1999, except for paragraph 2 of Note 12,
which is as of March 19, 1999
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
----------------------------------------------- ------- ------- -------
<S> <C> <C> <C>
REVENUES
Premiums................................... $ 0.5 $ 22.8 $ 32.7
Universal life and investment product
policy fees.............................. 267.4 212.2 176.2
Net investment income...................... 151.3 164.2 171.7
Net realized investment gains (losses)..... 20.0 2.9 (3.6)
Other income............................... 0.6 1.4 0.9
------- ------- -------
Total revenues......................... 439.8 403.5 377.9
------- ------- -------
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims, losses and loss
adjustment expenses...................... 153.9 187.8 192.6
Policy acquisition expenses................ 64.6 2.8 49.9
Sales practice litigation.................. 21.0 -- --
Loss from cession of disability income
business................................. -- 53.9 --
Other operating expenses................... 104.1 101.3 86.6
------- ------- -------
Total benefits, losses and expenses.... 343.6 345.8 329.1
------- ------- -------
Income before federal income taxes............. 96.2 57.7 48.8
------- ------- -------
FEDERAL INCOME TAX EXPENSE (BENEFIT)
Current.................................... 22.1 13.9 26.9
Deferred................................... 11.8 7.1 (9.8)
------- ------- -------
Total federal income tax expense....... 33.9 21.0 17.1
------- ------- -------
Net income..................................... $ 62.3 $ 36.7 $ 31.7
------- ------- -------
------- ------- -------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-1
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1998 1997
-------------------------------------------------------- ---------- ----------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities at fair value (amortized cost of
$1,284.6 and $1,340.5)............................ $ 1,330.4 $ 1,402.5
Equity securities at fair value (cost of $27.4 and
$34.4)............................................ 31.8 54.0
Mortgage loans...................................... 230.0 228.2
Real estate......................................... 14.5 12.0
Policy loans........................................ 151.5 140.1
Other long-term investments......................... 9.1 20.3
---------- ----------
Total investments............................... 1,767.3 1,857.1
---------- ----------
Cash and cash equivalents............................. 217.9 31.1
Accrued investment income............................. 33.5 34.2
Deferred policy acquisition costs..................... 950.5 765.3
Reinsurance receivables on paid and unpaid losses,
future policy benefits and unearned premiums........ 308.0 251.1
Other assets.......................................... 46.9 10.7
Separate account assets............................... 11,020.4 7,567.3
---------- ----------
Total assets.................................... $ 14,344.5 $ 10,516.8
---------- ----------
---------- ----------
LIABILITIES
Policy liabilities and accruals:
Future policy benefits.............................. $ 2,284.8 $ 2,097.3
Outstanding claims, losses and loss adjustment
expenses.......................................... 17.9 18.5
Unearned premiums................................... 2.7 1.8
Contractholder deposit funds and other policy
liabilities....................................... 38.1 32.5
---------- ----------
Total policy liabilities and accruals........... 2,343.5 2,150.1
---------- ----------
Expenses and taxes payable............................ 146.2 77.6
Reinsurance premiums payable.......................... 45.7 4.9
Deferred federal income taxes......................... 78.8 75.9
Separate account liabilities.......................... 11,020.4 7,567.3
---------- ----------
Total liabilities............................... 13,634.6 9,875.8
---------- ----------
Commitments and contingencies (Note 12)
SHAREHOLDER'S EQUITY
Common stock, $1,000 par value, 10,000 shares
authorized, 2,524 and 2,521 shares issued and
outstanding......................................... 2.5 2.5
Additional paid-in capital............................ 407.9 386.9
Accumulated other comprehensive income................ 24.1 38.5
Retained earnings..................................... 275.4 213.1
---------- ----------
Total shareholder's equity...................... 709.9 641.0
---------- ----------
Total liabilities and shareholder's equity...... $ 14,344.5 $ 10,516.8
---------- ----------
---------- ----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-2
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
----------------------------------------------- -------- -------- --------
<S> <C> <C> <C>
COMMON STOCK................................... $ 2.5 $ 2.5 $ 2.5
-------- -------- --------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of period............. 386.9 346.3 324.3
Issuance of common stock................... 21.0 40.6 22.0
-------- -------- --------
Balance at end of period................... 407.9 386.9 346.3
-------- -------- --------
ACCUMULATED OTHER COMPREHENSIVE INCOME
Net unrealized appreciation on investments:
Balance at beginning of period............. 38.5 20.5 23.8
Appreciation (depreciation) during the
period:
Net (depreciation) appreciation on
available-for-sale securities........ (23.4) 27.0 (5.1)
Benefit (provision) for deferred
federal income taxes................. 9.0 (9.0) 1.8
-------- -------- --------
(14.4) 18.0 (3.3)
-------- -------- --------
Balance at end of period................... 24.1 38.5 20.5
-------- -------- --------
RETAINED EARNINGS
Balance at beginning of period............. 213.1 176.4 144.7
Net income................................. 62.3 36.7 31.7
-------- -------- --------
Balance at end of period................... 275.4 213.1 176.4
-------- -------- --------
Total shareholder's equity............. $ 709.9 $ 641.0 $ 545.7
-------- -------- --------
-------- -------- --------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-3
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
-------------------------------------------- ------- ------- -------
<S> <C> <C> <C>
Net income.................................. $ 62.3 $ 36.7 $ 31.7
Other comprehensive income:
Net (depreciation) appreciation on
available-for-sale securities......... (23.4) 27.0 (5.1)
Benefit (provision) for deferred federal
income taxes.......................... 9.0 (9.0) 1.8
------- ------- -------
Other comprehensive income.......... (14.4) 18.0 (3.3)
------- ------- -------
Comprehensive income.................... 47.9 $ 54.7 $ 28.4
------- ------- -------
------- ------- -------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-4
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
-------------------------------------------- -------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................. $ 62.3 $ 36.7 $ 31.7
Adjustments to reconcile net income to
net cash used in operating activities:
Net realized gains.................. (20.0) (2.9) 3.6
Net amortization and depreciation... (7.1) -- 3.5
Sales practice litigation expense... 21.0
Loss from cession of disability
income business................... -- 53.9 --
Deferred federal income taxes....... 11.8 7.1 (9.8)
Payment related to cession of
disability income business........ -- (207.0) --
Change in deferred acquisition
costs............................. (177.8) (181.3) (66.8)
Change in reinsurance premiums
payable........................... 40.8 3.9 (0.2)
Change in accrued investment
income............................ 0.7 3.5 1.2
Change in policy liabilities and
accruals, net..................... 193.1 (72.4) (39.9)
Change in reinsurance receivable.... (56.9) 22.1 (1.5)
Change in expenses and taxes
payable........................... 55.4 0.2 32.3
Separate account activity, net...... (0.5) 1.6 8.0
Other, net.......................... (28.0) (8.7) 2.3
-------- -------- --------
Net cash provided by (used in)
operating activities.......... 94.8 (343.3) (35.6)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals and maturities
of available-for-sale fixed
maturities............................ 187.0 909.7 809.4
Proceeds from disposals of equity
securities............................ 53.3 2.4 1.5
Proceeds from disposals of other
investments........................... 22.7 23.7 17.4
Proceeds from mortgages matured or
collected............................. 60.1 62.9 34.0
Purchase of available-for-sale fixed
maturities............................ (136.0) (579.7) (795.8)
Purchase of equity securities........... (30.6) (3.2) (13.2)
Purchase of other investments........... (22.7) (9.0) (13.9)
Purchase of mortgages................... (58.9) (70.4) (22.3)
Other investing activities, net......... (3.9) -- (2.0)
-------- -------- --------
Net cash provided by investing
activities........................ 71.0 336.4 15.1
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of stock and
capital paid in....................... 21.0 19.2 22.0
-------- -------- --------
Net cash provided by financing
activities........................ 21.0 19.2 22.0
-------- -------- --------
Net change in cash and cash equivalents..... 186.8 12.3 1.5
Cash and cash equivalents, beginning of
period..................................... 31.1 18.8 17.3
-------- -------- --------
Cash and cash equivalents, end of period.... $ 217.9 $ 31.1 $ 18.8
-------- -------- --------
-------- -------- --------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid........................... $ 0.6 $ -- $ 3.4
Income taxes paid....................... $ 36.2 $ 5.4 $ 16.5
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
Allmerica Financial Life Insurance and Annuity Company ("AFLIAC" or the
"Company") is organized as a stock life insurance company, and is a wholly owned
subsidiary of SMA Financial Corporation ("SMAFCO"), which is wholly owned by
First Allmerica Financial Life Insurance Company ("FAFLIC"). FAFLIC is a wholly
owned subsidiary of Allmerica Financial Corporation ("AFC").
The consolidated financial statements of AFLIAC include the accounts of Somerset
Square, Inc., a wholly-owned non-insurance company, which was transferred from
SMAFCO effective November 30, 1997 and dissolved as a subsidiary, effective
November 30, 1998. Its results of operations are included for 11 months of 1998
and for the month of December, 1997.
The Statutory stockholder's equity of the Company is being maintained at a
minimum level of 5% of general account assets by FAFLIC in accordance with a
policy established by vote of FAFLIC's Board of Directors.
The preparation of financial statements in conformity with generally accepted
accounting principles requires the Company to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
B. VALUATION OF INVESTMENTS
In accordance with the provisions of Statement of Financial Accounting Standards
No. 115 ("Statement No. 115"), "Accounting for Certain Investments in Debt and
Equity Securities", the Company is required to classify its investments into one
of three categories: held-to-maturity, available-for-sale or trading. The
Company determines the appropriate classification of debt securities at the time
of purchase and re-evaluates such designation as of each balance sheet date.
Marketable equity securities and debt securities are classified as
available-for-sale. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses, net of tax, reported in a separate
component of shareholder's equity. The amortized cost of debt securities is
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization is included in investment income.
Mortgage loans on real estate are stated at unpaid principal balances, net of
unamortized discounts and reserves. Reserves on mortgage loans are based on
losses expected by the Company to be realized on transfers of mortgage loans to
real estate (upon foreclosure), on the disposition or settlement of mortgage
loans and on mortgage loans which the Company believes may not be collectible in
full. In establishing reserves, the Company considers, among other things, the
estimated fair value of the underlying collateral.
Fixed maturities and mortgage loans that are delinquent are placed on
non-accrual status, and thereafter interest income is recognized only when cash
payments are received.
Policy loans are carried principally at unpaid principal balances.
During 1997, the Company adopted to a plan to dispose of all real estate assets
by the end of 1998. As of December 31, 1998, there was 1 property remaining in
the Company's real estate portfolio, which is being actively marketed. As a
result of the Plan, real estate held by the Company and real estate joint
ventures were written down to the estimated fair value less cost of disposal.
Depreciation is not recorded on this asset while it is held for disposal.
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Realized investment gains and losses, other than those related to separate
accounts for which the Company does not bear the investment risk, are reported
as a component of revenues based upon specific identification of the investment
assets sold. When an other-than-temporary impairment of the value of a specific
investment or a group of investments is determined, a realized investment loss
is recorded. Changes in the valuation allowance for mortgage loans are included
in realized investment gains or losses.
C. FINANCIAL INSTRUMENTS
In the normal course of business, the Company enters into transactions involving
various types of financial instruments, including debt, investments such as
fixed maturities, mortgage loans and equity securities and investment and loan
commitments. These instruments involve credit risk and also may be subject to
risk of loss due to interest rate fluctuation. The Company evaluates and
monitors each financial instrument individually and, when appropriate, obtains
collateral or other security to minimize losses.
D. CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes cash on hand, amounts due from banks and
highly liquid debt instruments purchased with an original maturity of three
months or less.
E. DEFERRED POLICY ACQUISITION COSTS
Acquisition costs consist of commissions, underwriting costs and other costs,
which vary with, and are primarily related to, the production of revenues.
Acquisition costs related to universal life products, variable annuities and
contractholder deposit funds are deferred and amortized in proportion to total
estimated gross profits from investment yields, mortality, surrender charges and
expense margins over the expected life of the contracts. This amortization is
reviewed annually and adjusted retrospectively when the Company revises its
estimate of current or future gross profits to be realized from this group of
products, including realized and unrealized gains and losses from investments.
Acquisition costs related to fixed annuities and other life insurance products
are deferred and amortized, generally in proportion to the ratio of annual
revenue to the estimated total revenues over the contract periods based upon the
same assumptions used in estimating the liability for future policy benefits.
Deferred acquisition costs for each product are reviewed to determine if they
are recoverable from future income, including investment income. If such costs
are determined to be unrecoverable, they are expensed at the time of
determination. Although realization of deferred policy acquisition costs is not
assured, the Company believes it is more likely than not that all of these costs
will be realized. The amount of deferred policy acquisition costs considered
realizable, however, could be reduced in the near term if the estimates of gross
profits or total revenues discussed above are reduced. The amount of
amortization of deferred policy acquisition costs could be revised in the near
term if any of the estimates discussed above are revised.
F. SEPARATE ACCOUNTS
Separate account assets and liabilities represent segregated funds administered
and invested by the Company for the benefit of certain pension, variable annuity
and variable life insurance contractholders. Assets consist principally of
bonds, common stocks, mutual funds, and short-term obligations at market value.
The investment income, gains and losses of these accounts generally accrue to
the contractholders and, therefore, are not included in the Company's net
income. Appreciation and depreciation of the Company's interest in the separate
accounts, including undistributed net investment income, is reflected in
shareholder's equity or net investment income.
G. POLICY LIABILITIES AND ACCRUALS
Future policy benefits are liabilities for life, disability income and annuity
products. Such liabilities are established in amounts adequate to meet the
estimated future obligations of policies in force. The liabilities associated
with traditional life insurance products are computed using the net level
premium method for
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
individual life and annuity policies, and are based upon estimates as to future
investment yield, mortality and withdrawals that include provisions for adverse
deviation. Future policy benefits for individual life insurance and annuity
policies are computed using interest rates ranging from 3% to 6% for life
insurance and 3 1/2% to 9 1/2% for annuities. Mortality, morbidity and
withdrawal assumptions for all policies are based on the Company's own
experience and industry standards. Liabilities for universal life include
deposits received from customers and investment earnings on their fund balances,
less administrative charges. Universal life fund balances are also assessed
mortality and surrender charges.
Individual disability income benefit liabilities for active lives are estimated
using the net level premium method, and assumptions as to future morbidity,
withdrawals and interest which provide a margin for adverse deviation. Benefit
liabilities for disabled lives are estimated using the present value of benefits
method and experience assumptions as to claim terminations, expenses and
interest.
Liabilities for outstanding claims, losses and loss adjustment expenses are
estimates of payments to be made for reported claims and estimates of claims
incurred but not reported for individual life and disability income policies.
These estimates are continually reviewed and adjusted as necessary; such
adjustments are reflected in current operations.
Contractholder deposit funds and other policy liabilities include
investment-related products and consist of deposits received from customers and
investment earnings on their fund balances.
All policy liabilities and accruals are based on the various estimates discussed
above. Although the adequacy of these amounts cannot be assured, the Company
believes that it is more likely than not that policy liabilities and accruals
will be sufficient to meet future obligations of policies in force. The amount
of liabilities and accruals, however, could be revised in the near term if the
estimates discussed above are revised.
H. PREMIUM AND FEE REVENUE AND RELATED EXPENSES
Premiums for individual life and individual annuity products, excluding
universal life and investment-related products, are considered revenue when due.
Individual disability income insurance premiums are recognized as revenue over
the related contract periods. The unexpired portion of these premiums is
recorded as unearned premiums. Benefits, losses and related expenses are matched
with premiums, resulting in their recognition over the lives of the contracts.
This matching is accomplished through the provision for future benefits,
estimated and unpaid losses and amortization of deferred policy acquisition
costs. Revenues for investment-related products consist of net investment income
and contract charges assessed against the fund values. Related benefit expenses
primarily consist of net investment income credited to the fund values after
deduction for investment and risk charges. Revenues for universal life and group
variable universal life products consist of net investment income, with
mortality, administration and surrender charges assessed against the fund
values. Related benefit expenses include universal life benefit claims in excess
of fund values and net investment income credited to universal life fund values.
Certain policy charges that represent compensation for services to be provided
in future periods are deferred and amortized over the period benefited using the
same assumptions used to amortize capitalized acquisition costs.
I. FEDERAL INCOME TAXES
AFC and its domestic subsidiaries file a consolidated United States federal
income tax return. Entities included within the consolidated group are
segregated into either a life insurance or non-life insurance company subgroup.
The consolidation of these subgroups is subject to certain statutory
restrictions on the percentage of eligible non-life tax losses that can be
applied to offset life insurance company taxable income.
The Board of Directors has delegated to AFC management, the development and
maintenance of appropriate federal income tax allocation policies and
procedures, which are subject to written agreement between the
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
companies. The Federal income tax for all subsidiaries in the consolidated
return of AFC is calculated on a separate return basis. Any current tax
liability is paid to AFC. Tax benefits resulting from taxable operating losses
or credits of AFC's subsidiaries are not reimbursed to the subsidiary until such
losses or credits can be utilized by the subsidiary on a separate return basis.
Deferred income taxes are generally recognized when assets and liabilities have
different values for financial statement and tax reporting purposes, and for
other temporary taxable and deductible differences as defined by Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (Statement
No. 109). These differences result primarily from policy reserves, policy
acquisition expenses, and unrealized appreciation or depreciation on
investments.
J. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("Statement No. 133"), which establishes
accounting and reporting standards for derivative instruments. Statement No. 133
requires that an entity recognize all derivatives as either assets or
liabilities at fair value in the statement of financial position, and
establishes special accounting for the following three types of hedges; fair
value hedges, cash flow hedges, and hedges of foreign currency exposures of net
investment in foreign operations. This statement is effective for fiscal years
beginning after June 15, 1999. The Company is currently assessing the impact of
adoption of Statement No. 133.
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position 98-1, "Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use" ("SoP 98-1"). SoP 98-1 requires that
certain costs incurred in developing internal-use computer software be
capitalized and provides guidance for determining whether computer software is
to be considered for internal use. This statement is effective for fiscal years
beginning after December 15, 1998. In the second quarter, the Company adopted
SoP 98-1 effective January 1, 1998, resulting in an increase in pre-tax income
of $9.8 million through December 31, 1998. The adoption of SoP 98-1 did not have
a material effect on the results of operations or financial position for the
three months ended March 31, 1998.
In December 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 97-3, "Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments" ("SoP 97-3"). SoP 97-3 provides
guidance when a liability should be recognized for guaranty fund and other
assessments and how to measure the liability. This statement allows for the
discounting of the liability if the amount and timing of the cash payments are
fixed and determinable. In addition, it provides criteria for when an asset may
be recognized for a portion or all of the assessment liability or paid
assessment that can be recovered through premium tax offsets or policy
surcharges. This statement is effective for fiscal years beginning after
December 15, 1998. The Company believes that the adoption of this statement will
not have a material effect on the results of operations or financial position.
In June 1997, the FASB issued Statement No. 131, "Disclosures About Segments of
an Enterprise and Related Information" ("Statement No. 131"). This statement
establishes standards for the way that public enterprises report information
about operating segments in annual financial statements and requires that
selected information about those operating segments be reported in interim
financial statements. This statement supersedes Statement No. 14, "Financial
Reporting for Segments of a Business Enterprise". Statement No. 131 requires
that all public enterprises report financial and descriptive information about
their reportable operating segments. Operating segments are defined as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. This statement
is effective for fiscal years
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
beginning after December 15, 1997. AFLIAC consists of one segment, Allmerica
Financial Services, which underwrites and distributes variable annuities and
variable universal life via retail channels.
In June 1997, the FASB also issued Statement No. 130, "Reporting Comprehensive
Income" ("Statement No. 130"), which established standards for the reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. All items that are required to be
recognized under accounting standards as components of comprehensive income are
to be reported in a financial statement that is displayed with the same
prominence as other financial statements. This statement stipulates that
comprehensive income reflect the change in equity of an enterprise during a
period from transactions and other events and circumstances from non-owner
sources. This statement is effective for fiscal years beginning after December
15, 1997. The Company adopted Statement No. 130 for the first quarter of 1998,
which resulted primarily in reporting unrealized gains and losses on investments
in debt and equity securities in comprehensive income.
2. SIGNIFICANT TRANSACTIONS
Effective January 1, 1998, the Company entered into an agreement with a highly
rated reinsurer to reinsure the mortality risk on the universal life and
variable universal life blocks of business. The agreement does not have a
material effect on the results of operations or financial position of the
Company.
On April 14, 1997, the Company entered into an agreement in principle to cede
substantially all of the Company's individual disability income line of business
under a 100% coinsurance agreement with a highly rated reinsurer. The
coinsurance agreement became effective October 1, 1997. The transaction has
resulted in the recognition of a $53.9 million pre-tax loss in the first quarter
of 1997.
During 1998, 1997 and 1996 , SMAFCO contributed $21.0 million, $40.6 million and
$22.0 million, respectively, of additional paid-in capital to the Company. The
nature of the 1997 contribution was $19.2 million in cash and $21.4 million in
other assets including Somerset Square, Inc.
3. INVESTMENTS
A. SUMMARY OF INVESTMENTS
The Company accounts for its investments, all of which are classified as
available-for-sale, in accordance with the provisions of Statement No. 115.
The amortized cost and fair value of available-for-sale fixed maturities and
equity securities were as follows:
<TABLE>
<CAPTION>
1998
----------------------------------------------
GROSS GROSS
DECEMBER 31, AMORTIZED UNREALIZED UNREALIZED FAIR
(IN MILLIONS) COST (1) GAINS LOSSES VALUE
- ---------------------------------------- --------- ---------- ---------- --------
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S.
government and agency securities....... $ 5.8 $ 0.8 $-- $ 6.6
States and political subdivisions....... 2.7 0.2 -- 2.9
Foreign governments..................... 48.8 1.6 1.5 48.9
Corporate fixed maturities.............. 1,096.0 58.0 17.7 1,136.3
Mortgage-backed securities.............. 131.3 5.8 1.4 135.7
--------- ----- ----- --------
Total fixed maturities.................. $ 1,284.6 $66.4 $20.6 $1,330.4
--------- ----- ----- --------
--------- ----- ----- --------
Equity securities....................... $ 27.4 $ 8.9 $ 4.5 $ 31.8
--------- ----- ----- --------
--------- ----- ----- --------
</TABLE>
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<S> <C> <C> <C> <C>
1997
----------------------------------------------
<CAPTION>
GROSS GROSS
DECEMBER 31, AMORTIZED UNREALIZED UNREALIZED FAIR
(IN MILLIONS) COST (1) GAINS LOSSES VALUE
- ---------------------------------------- --------- ---------- ---------- --------
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S.
government and agency securities....... $ 6.3 $ 0.5 $-- $ 6.8
States and political subdivisions....... 2.8 0.2 -- 3.0
Foreign governments..................... 50.1 2.0 -- 52.1
Corporate fixed maturities.............. 1,147.5 58.7 3.3 1,202.9
Mortgage-backed securities.............. 133.8 5.2 1.3 137.7
--------- ----- ----- --------
Total fixed maturities.................. $ 1,340.5 $66.6 $ 4.6 $1,402.5
--------- ----- ----- --------
--------- ----- ----- --------
Equity securities....................... $ 34.4 $19.9 $ 0.3 $ 54.0
--------- ----- ----- --------
--------- ----- ----- --------
</TABLE>
(1) Amortized cost for fixed maturities and cost for equity securities.
In connection with AFLIAC's voluntary withdrawal of its license in New York,
AFLIAC agreed with the New York Department of Insurance to maintain, through a
custodial account in New York, a security deposit, the market value of which
will at all times equal 102% of all outstanding liabilities of AFLIAC for New
York policyholders, claimants and creditors. At December 31, 1998, the amortized
cost and market value of these assets on deposit in New York were $268.5 million
and $284.1 million, respectively. At December 31, 1997, the amortized cost and
market value of assets on deposit were $276.8 million and $291.7 million,
respectively. In addition, fixed maturities, excluding those securities on
deposit in New York, with an amortized cost of $4.2 million were on deposit with
various state and governmental authorities at December 31, 1998 and 1997.
There were no contractual fixed maturity investment commitments at December 31,
1998 and 1997, respectively.
The amortized cost and fair value by maturity periods for fixed maturities are
shown below. Actual maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties, or the Company may have the right to put or sell the
obligations back to the issuers. Mortgage backed securities are included in the
category representing their ultimate maturity.
<TABLE>
<CAPTION>
1998
--------------------
DECEMBER 31, AMORTIZED FAIR
(IN MILLIONS) COST VALUE
- ------------------------------------------------------------ --------- --------
<S> <C> <C>
Due in one year or less..................................... $ 97.7 $ 98.9
Due after one year through five years....................... 269.1 278.3
Due after five years through ten years...................... 638.2 658.5
Due after ten years......................................... 279.6 294.7
--------- --------
Total....................................................... $ 1,284.6 $1,330.4
--------- --------
--------- --------
</TABLE>
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The proceeds from voluntary sales of available-for-sale securities and the gross
realized gains and gross realized losses on those sales were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, PROCEEDS FROM GROSS GROSS
(IN MILLIONS) VOLUNTARY SALES GAINS LOSSES
- ------------------------------------------------------------ --------------- ----- ------
<S> <C> <C> <C>
1998
Fixed maturities............................................ $ 60.0 $ 2.0 $ 2.0
Equity securities........................................... $ 52.6 $17.5 $ 0.9
1997
Fixed maturities............................................ $702.9 $11.4 $ 5.0
Equity securities........................................... $ 1.3 $ 0.5 $ --
1996
Fixed maturities............................................ $496.6 $ 4.3 $ 8.3
Equity securities........................................... $ 1.5 $ 0.4 $ 0.1
</TABLE>
Unrealized gains and losses on available-for-sale and other securities, are
summarized as follows:
<TABLE>
<CAPTION>
EQUITY
FOR THE YEARS ENDED DECEMBER 31, FIXED SECURITIES
(IN MILLIONS) MATURITIES AND OTHER (1) TOTAL
- ------------------------------------------------------------ ---------- ------------- -------
<S> <C> <C> <C>
1998
Net appreciation, beginning of year......................... $ 22.1 $ 16.4 $ 38.5
---------- ------ -------
Net depreciation on available-for-sale securities........... (16.2) (14.3) (30.5)
Net appreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ 7.1 -- 7.1
Benefit from deferred federal income taxes.................. 3.2 5.8 9.0
---------- ------ -------
(5.9) (8.5) (14.4)
---------- ------ -------
Net appreciation, end of year............................... $ 16.2 $ 7.9 $ 24.1
---------- ------ -------
---------- ------ -------
1997
Net appreciation, beginning of year......................... $ 12.7 $ 7.8 $ 20.5
---------- ------ -------
Net appreciation on available-for-sale securities........... 24.3 12.5 36.8
Net depreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ (9.8) -- (9.8)
Provision for deferred federal income taxes................. (5.1) (3.9) (9.0)
---------- ------ -------
9.4 8.6 18.0
---------- ------ -------
Net appreciation, end of year............................... $ 22.1 $ 16.4 $ 38.5
---------- ------ -------
---------- ------ -------
1996
Net appreciation, beginning of year......................... $ 20.4 $ 3.4 $ 23.8
---------- ------ -------
Net (depreciation) appreciation on available-for-sale
securities................................................. (20.8) 6.7 (14.1)
Net appreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ 9.0 -- 9.0
Benefit (provision) for deferred federal income taxes....... 4.1 (2.3) 1.8
---------- ------ -------
(7.7) 4.4 (3.3)
---------- ------ -------
Net appreciation, end of year............................... $ 12.7 $ 7.8 $ 20.5
---------- ------ -------
---------- ------ -------
</TABLE>
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) Includes net appreciation on other investments of $.9 million, $1.3 million,
and $2.2 million in 1998, 1997, and 1996, respectively.
B. MORTGAGE LOANS AND REAL ESTATE
AFLIAC's mortgage loans and real estate are diversified by property type and
location. Real estate investments have been obtained primarily through
foreclosure. Mortgage loans are collateralized by the related properties and
generally are no more than 75% of the property's value at the time the original
loan is made.
The carrying values of mortgage loans and real estate investments net of
applicable reserves were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------------------------------------------------------ ------- -------
<S> <C> <C>
Mortgage loans.............................................. $ 230.0 $ 228.2
Real estate held for sale................................... 14.5 12.0
------- -------
Total mortgage loans and real estate........................ $ 244.5 $ 240.2
------- -------
------- -------
</TABLE>
Reserves for mortgage loans were $3.3 million and $9.4 million at December 31,
1998 and 1997, respectively.
During 1997, the Company committed to a plan to dispose of all real estate
assets by the end of 1998. At December 31, 1998, there was 1 property remaining
in the Company's real estate portfolio, which is being actively marketed. As a
result of the Plan, during 1997, real estate assets with a carrying amount of
$15.7 million were written down to the estimated fair value less cost to sell of
$12.0 million, and a net realized investment loss of $3.7 million was
recognized. Depreciation was not recorded on these assets while they were held
for disposal.
There were no non-cash investing activities, including real estate acquired
through foreclosure of mortgage loans, in 1998 and 1997. During 1996, non-cash
investing activities included real estate acquired through foreclosure of
mortgage loans, which had a fair value of $0.9 million.
There were no contractual commitments to extend credit under commercial mortgage
loan agreements at December 31, 1998. These commitments generally expire within
one year.
Mortgage loans and real estate investments comprised the following property
types and geographic regions:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------------------------------------------------------ ------ ------
<S> <C> <C>
Property type:
Office building........................................... $129.2 $101.7
Residential............................................... 18.9 19.3
Retail.................................................... 37.4 42.2
Industrial/warehouse...................................... 59.2 61.9
Other..................................................... 3.1 24.5
Valuation allowances...................................... (3.3) (9.4)
------ ------
Total....................................................... $244.5 $240.2
------ ------
------ ------
</TABLE>
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------------------------------------------------------ ------ ------
Geographic region:
<S> <C> <C>
South Atlantic............................................ $ 55.5 $ 68.7
Pacific................................................... 80.0 56.6
East North Central........................................ 41.4 61.4
Middle Atlantic........................................... 22.5 29.8
West South Central........................................ 6.7 6.9
New England............................................... 26.9 12.4
Other..................................................... 14.8 13.8
Valuation allowances...................................... (3.3) (9.4)
------ ------
Total....................................................... $244.5 $240.2
------ ------
------ ------
</TABLE>
At December 31, 1998, scheduled mortgage loan maturities were as follows: 1999
- -- $24.8 million; 2000 -- $43.5 million; 2001 -- $6.6 million; 2002 -- $11.5
million; 2003 -- $0.6 million; and $143.0 million thereafter. Actual maturities
could differ from contractual maturities because borrowers may have the right to
prepay obligations with or without prepayment penalties and loans may be
refinanced. During 1998, the Company did not refinance any mortgage loans based
on terms which differed from those granted to new borrowers.
C. INVESTMENT VALUATION ALLOWANCES
Investment valuation allowances, which have been deducted in arriving at
investment carrying values as presented in the balance sheet and changes thereto
are shown below.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, BALANCE AT BALANCE AT
(IN MILLIONS) JANUARY 1 PROVISIONS WRITE-OFFS DECEMBER 31
- ------------------------------------------------------------ ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
1998
Mortgage loans.............................................. $ 9.4 $(4.5) $1.6 $ 3.3
----- ----- --- -----
----- ----- --- -----
1997
Mortgage loans.............................................. $ 9.5 $ 1.1 $1.2 $ 9.4
Real estate................................................. 1.7 3.7 5.4 --
----- ----- --- -----
Total................................................... $11.2 $ 4.8 $6.6 $ 9.4
----- ----- --- -----
----- ----- --- -----
1996
Mortgage loans.............................................. $12.5 $ 4.5 $7.5 $ 9.5
Real estate................................................. 2.1 -- 0.4 1.7
----- ----- --- -----
Total................................................... $14.6 $ 4.5 $7.9 $11.2
----- ----- --- -----
----- ----- --- -----
</TABLE>
Provisions on mortgages during 1998 reflect the release of redundant reserves.
Write-offs of $5.4 million to the investment valuation allowance related to real
estate in 1997 primarily reflect write downs to the estimated fair value less
cost to sell pursuant to the aforementioned 1997 plan of disposal.
The carrying value of impaired loans was $15.3 million and $20.6 million, with
related reserves of $1.5 million and $7.1 million as of December 31, 1998 and
1997, respectively. All impaired loans were reserved as of December 31, 1998 and
1997.
The average carrying value of impaired loans was $17.0 million, $19.8 million
and $26.3 million, with related interest income while such loans were impaired
of $2.0 million, $2.2 million and $3.4 million as of December 31, 1998, 1997 and
1996, respectively.
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
D. OTHER
At December 31, 1998, AFLIAC had no concentration of investments in a single
investee exceeding 10% of shareholder's equity.
4. INVESTMENT INCOME AND GAINS AND LOSSES
A. NET INVESTMENT INCOME
The components of net investment income were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------------------------------------------------------ ------ ------ ------
<S> <C> <C> <C>
Fixed maturities............................................ $107.7 $130.0 $137.2
Mortgage loans.............................................. 25.5 20.4 22.0
Equity securities........................................... 0.3 1.3 0.7
Policy loans................................................ 11.7 10.8 10.2
Real estate................................................. 3.3 3.9 6.2
Other long-term investments................................. 1.5 1.0 0.8
Short-term investments...................................... 4.2 1.4 1.4
------ ------ ------
Gross investment income..................................... 154.2 168.8 178.5
Less investment expenses.................................... (2.9) (4.6) (6.8)
------ ------ ------
Net investment income....................................... $151.3 $164.2 $171.7
------ ------ ------
------ ------ ------
</TABLE>
There were no mortgage loans or fixed maturities on non-accrual status at
December 31, 1998. The effect of non-accruals, compared with amounts that would
have been recognized in accordance with the original terms of the investment,
had no impact in 1998 and 1997, and reduced net income by $0.1 million in 1996.
The payment terms of mortgage loans may from time to time be restructured or
modified. The investment in restructured mortgage loans, based on amortized
cost, amounted to $12.6 million, $21.1 million and $25.4 million at December 31,
1998, 1997 and 1996, respectively. Interest income on restructured mortgage
loans that would have been recorded in accordance with the original terms of
such loans amounted to $1.4 million, $1.9 million and $3.6 million in 1998,
1997, and 1996, respectively. Actual interest income on these loans included in
net investment income aggregated $1.8 million, $2.1 million and $2.2 million in
1998, 1997, and 1996, respectively.
There were no fixed maturities or mortgage loans which, were non-income
producing for the twelve months ended December 31, 1998.
B. REALIZED INVESTMENT GAINS AND LOSSES
Realized gains (losses) on investments were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------------------------------------------------------ ------ ------ ------
<S> <C> <C> <C>
Fixed maturities............................................ $ (6.1) $ 3.0 $ (3.3)
Mortgage loans.............................................. 8.0 (1.1) (3.2)
Equity securities........................................... 15.7 0.5 0.3
Real estate................................................. 2.4 (1.5) 2.5
Other....................................................... -- 2.0 0.1
------ ------ ------
Net realized investment gains (losses)...................... $ 20.0 $ 2.9 $ (3.6)
------ ------ ------
------ ------ ------
</TABLE>
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
C. OTHER COMPREHENSIVE INCOME RECONCILIATION
The following table provides a reconciliation of gross unrealized gains to the
net balance shown in the Statement of Comprehensive income:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------------------------------------------------------ ------- ------- -------
<S> <C> <C> <C>
Unrealized gains on securities:
Unrealized holding gains arising during period (net of taxes
of $(5.6) million, $10.2 million and $(2.9) million in
1998, 1997 and 1996 respectively).......................... $ (8.2) $ 20.3 $ (5.3)
Less: reclassification adjustment for gains included in net
income (net of taxes of $3.4 million, $1.2 million and
$(1.0) million in 1998, 1997 and 1996 respectively)........ 6.2 2.3 (2.0)
------- ------- -------
Other comprehensive income.................................. $ (14.4) $ 18.0 $ (3.3)
------- ------- -------
------- ------- -------
</TABLE>
5. FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS
Statement No. 107, "Disclosures about Fair Value of Financial Instruments"
("Statement No, 107"), requires disclosure of fair value information about
certain financial instruments (insurance contracts, real estate, goodwill and
taxes are excluded) for which it is practicable to estimate such values, whether
or not these instruments are included in the balance sheet. The fair values
presented for certain financial instruments are estimates which, in many cases,
may differ significantly from the amounts which could be realized upon immediate
liquidation. In cases where market prices are not available, estimates of fair
value are based on discounted cash flow analyses, which utilize current interest
rates for similar financial instruments, which have comparable terms and credit
quality.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
CASH AND CASH EQUIVALENTS
For these short-term investments, the carrying amount approximates fair value.
FIXED MATURITIES
Fair values are based on quoted market prices, if available. If a quoted market
price is not available, fair values are estimated using independent pricing
sources or internally developed pricing models using discounted cash flow
analyses.
EQUITY SECURITIES
Fair values are based on quoted market prices, if available. If a quoted market
price is not available, fair values are estimated using independent pricing
sources or internally developed pricing models.
MORTGAGE LOANS
Fair values are estimated by discounting the future contractual cash flows using
the current rates at which similar loans would be made to borrowers with similar
credit ratings. The fair value of below investment grade mortgage loans is
limited to the lesser of the present value of the cash flows or book value.
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
POLICY LOANS
The carrying amount reported in the balance sheet approximates fair value since
policy loans have no defined maturity dates and are inseparable from the
insurance contracts.
INVESTMENT CONTRACTS (WITHOUT MORTALITY FEATURES)
Fair values for the Company's liabilities under investment type contracts are
estimated based on current surrender values.
The estimated fair values of the financial instruments were as follows:
<TABLE>
<CAPTION>
1998 1997
--------------------- ---------------------
DECEMBER 31, CARRYING FAIR CARRYING FAIR
(IN MILLIONS) VALUE VALUE VALUE VALUE
- ------------------------------------------------------------ --------- --------- --------- ---------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents................................. $ 217.9 $ 217.9 $ 31.1 $ 31.1
Fixed maturities.......................................... 1,330.4 1,330.4 1,402.5 1,402.5
Equity securities......................................... 31.8 31.8 54.0 54.0
Mortgage loans............................................ 230.0 241.9 228.2 239.8
Policy loans.............................................. 151.5 151.5 140.1 140.1
--------- --------- --------- ---------
$ 1,961.6 $ 1,973.5 $ 1,855.9 $ 1,867.5
--------- --------- --------- ---------
--------- --------- --------- ---------
FINANCIAL LIABILITIES
Individual fixed annuity contracts........................ $ 1,069.4 $ 1,034.6 $ 876.0 $ 850.6
Supplemental contracts without life Contingencies......... 16.6 16.6 15.3 15.3
--------- --------- --------- ---------
$ 1,086.0 $ 1,051.2 $ 891.3 $ 865.9
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
6. FEDERAL INCOME TAXES
Provisions for federal income taxes have been calculated in accordance with the
provisions of Statement No. 109. A summary of the federal income tax expense
(benefit) in the statement of income is shown below:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------------------------------------------------------ ----- ----- -----
<S> <C> <C> <C>
Federal income tax expense (benefit)
Current................................................... $22.1 $13.9 $26.9
Deferred.................................................. 11.8 7.1 (9.8)
----- ----- -----
Total....................................................... $33.9 $21.0 $17.1
----- ----- -----
----- ----- -----
</TABLE>
The provision for federal income taxes does not materially differ from the
amount of federal income tax determined by applying the appropriate U.S.
statutory income tax rate to income before federal income taxes.
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The deferred tax liabilities are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------------------------------------------------------ -------- --------
<S> <C> <C>
Deferred tax (assets) liabilities
Policy reserves........................................... $ (205.1) $ (175.8)
Deferred acquisition costs................................ 278.8 226.4
Investments, net.......................................... 12.5 27.0
Sales practice litigation................................. (7.4) --
Bad debt reserve.......................................... (0.4) (2.0)
Other, net................................................ 0.4 0.3
-------- --------
Deferred tax liability, net................................. $ 78.8 $ 75.9
-------- --------
-------- --------
</TABLE>
Gross deferred income tax liabilities totaled $291.7 million and $253.7 million
at December 31, 1998 and 1997, respectively. Gross deferred income tax assets
totaled $212.9 million and $177.8 at December 31, 1998 and 1997, respectively.
The Company believes, based on its recent earnings history and its future
expectations, that the Company's taxable income in future years will be
sufficient to realize all deferred tax assets. In determining the adequacy of
future income, the Company considered the future reversal of its existing
temporary differences and available tax planning strategies that could be
implemented, if necessary.
The Company's federal income tax returns are routinely audited by the IRS, and
provisions are routinely made in the financial statements in anticipation of the
results of these audits. The IRS has examined the consolidated group's federal
income tax returns through 1994. The Company has appealed certain adjustments
proposed by the IRS with respect to the consolidated group's federal income tax
returns for 1992, 1993, and 1994. Also, certain adjustments proposed by the IRS
with respect to FAFLIC/AFLIAC's federal income tax returns for 1982 and 1983
remain unresolved. If upheld, these adjustments would result in additional
payments; however, the Company will vigorously defend its position with respect
to these adjustments. In the Company's opinion, adequate tax liabilities have
been established for all years. However, the amount of these tax liabilities
could be revised in the near term if estimates of the Company's ultimate
liability are revised.
7. RELATED PARTY TRANSACTIONS
The Company has no employees of its own, but has agreements under which FAFLIC
provides management, space and other services, including accounting, electronic
data processing, human resources, legal and other staff functions. Charges for
these services are based on full cost including all direct and indirect overhead
costs, and amounted to $145.4 million and $124.1 million in 1998 and 1997. The
net amounts payable to FAFLIC and affiliates for accrued expenses and various
other liabilities and receivables were $16.4 million and $15.0 million at
December 31, 1998 and 1997, respectively.
8. DIVIDEND RESTRICTIONS
Delaware has enacted laws governing the payment of dividends to stockholders by
insurers. These laws affect the dividend paying ability of the Company.
Pursuant to Delaware's statute, the maximum amount of dividends and other
distributions that an insurer may pay in any twelve month period, without the
prior approval of the Delaware Commissioner of Insurance, is limited to the
greater of (i) 10% of its policyholders' surplus as of the preceding December 31
or (ii) the individual company's statutory net gain from operations for the
preceding calendar year (if such insurer is a
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
life company) or its net income (not including realized capital gains) for the
preceding calendar year (if such insurer is not a life company). Any dividends
to be paid by an insurer, whether or not in excess of the aforementioned
threshold, from a source other than statutory earned surplus would also require
the prior approval of the Delaware Commissioner of Insurance.
No dividends were declared by the Company during 1998, 1997 and 1996. During
1999, AFLIAC could pay dividends of $26.1 million to FAFLIC without prior
approval.
9. REINSURANCE
In the normal course of business, the Company seeks to reduce the loss that may
arise from events that cause unfavorable underwriting results by reinsuring
certain levels of risk in various areas of exposure with other insurance
enterprises or reinsurers. Reinsurance transactions are accounted for in
accordance with the provisions of Statement No. 113, "Accounting and Reporting
for Reinsurance of Short-Duration and Long-Duration Contracts" ("Statement No.
113").
The Company reinsures 100% of its traditional individual life and certain blocks
of its universal life business, substantially all of its disability income
business, and effective January 1, 1998, the mortality risk on the variable
universal life and remaining universal life blocks of business in-force at
December 31, 1997.
Amounts recoverable from reinsurers are estimated in a manner consistent with
the claim liability associated with the reinsured policy. Reinsurance contracts
do not relieve the Company from its obligations to policyholders. Failure of
reinsurers to honor their obligations could result in losses to the Company;
consequently, allowances are established for amounts deemed uncollectible. The
Company determines the appropriate amount of reinsurance based on evaluation of
the risks accepted and analyses prepared by consultants and reinsurers and on
market conditions (including the availability and pricing of reinsurance). The
Company also believes that the terms of its reinsurance contracts are consistent
with industry practice in that they contain standard terms with respect to lines
of business covered, limit and retention, arbitration and occurrence. Based on
its review of its reinsurers' financial statements and reputations in the
reinsurance marketplace, the Company believes that its reinsurers are
financially sound.
Amounts recoverable from reinsurers at December 31, 1998 and 1997 for the
disability income business were $230.8 million and $216.1 million, respectively,
traditional life were $11.4 million and $15.2 million, respectively, and
universal and variable universal life were $65.8 million and $19.8 million,
respectively.
The effects of reinsurance were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------------------------------------------------------ ------ ------ ------
<S> <C> <C> <C>
Insurance premiums:
Direct.................................................... $ 45.5 $ 48.8 $ 53.3
Assumed................................................... -- 2.6 3.1
Ceded..................................................... (45.0) (28.6) (23.7)
------ ------ ------
Net premiums................................................ $ 0.5 $ 22.8 $ 32.7
------ ------ ------
------ ------ ------
</TABLE>
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------------------------------------------------------ ------ ------ ------
Insurance and other individual policy benefits, claims,
losses and loss adjustment expenses:
<S> <C> <C> <C>
Direct.................................................... $204.0 $226.0 $206.4
Assumed................................................... -- 4.2 4.5
Ceded..................................................... (50.1) (42.4) (18.3)
------ ------ ------
Net policy benefits, claims, losses and loss adjustment
expenses................................................... $153.9 $187.8 $192.6
------ ------ ------
------ ------ ------
</TABLE>
10. DEFERRED POLICY ACQUISITION COSTS
The following reflects the changes to the deferred policy acquisition asset:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------------------------------------------------------ ------ ------ ------
<S> <C> <C> <C>
Balance at beginning of year................................ $765.3 $632.7 $555.7
Acquisition expenses deferred............................. 242.4 184.2 116.6
Amortized to expense during the year...................... (64.6) (53.1) (49.9)
Adjustment to equity during the year...................... 7.4 (10.2) 10.3
Adjustment for cession of disability income insurance..... -- (38.6) --
Adjustment for revision of universal life and variable
universal life insurance mortality assumptions.......... -- 50.3 --
------ ------ ------
Balance at end of year...................................... $950.5 $765.3 $632.7
------ ------ ------
------ ------ ------
</TABLE>
On October 1, 1997, the Company revised the mortality assumptions for universal
life and variable universal life product lines. These revisions resulted in a
$50.3 million recapitalization of deferred policy acquisition costs.
11. LIABILITIES FOR INDIVIDUAL DISABILITY INCOME BENEFITS
The Company regularly updates its estimates of liabilities for future policy
benefits and outstanding claims, losses and loss adjustment expenses as new
information becomes available and further events occur which may impact the
resolution of unsettled claims. Changes in prior estimates are recorded in
results of operations in the year such changes are determined to be needed.
The liability for future policy benefits and outstanding claims, losses and loss
adjustment expenses related to the Company's disability income business was
$233.3 million and $219.9 million at December 31, 1998 and 1997. Due to the
reinsurance agreement whereby the Company has ceded substantially all of its
disability income business to a highly rated reinsurer, the Company believes
that no material adverse development of losses will occur. However, the amount
of the liabilities could be revised in the near term if the estimates are
revised.
12. CONTINGENCIES
REGULATORY AND INDUSTRY DEVELOPMENTS
Unfavorable economic conditions may contribute to an increase in the number of
insurance companies that are under regulatory supervision. This may result in an
increase in mandatory assessments by state guaranty funds, or voluntary payments
by solvent insurance companies to cover losses to policyholders of insolvent or
rehabilitated companies. Mandatory assessments, which are subject to statutory
limits, can be partially
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
recovered through a reduction in future premium taxes in some states. The
Company is not able to reasonably estimate the potential effect on it of any
such future assessments or voluntary payments.
LITIGATION
In July 1997, a lawsuit on behalf of a putative class was instituted in
Louisiana against AFC and certain of its subsidiaries including AFLIAC, by
individual plaintiffs alleging fraud, unfair or deceptive acts, breach of
contract, misrepresentation, and related claims in the sale of life insurance
policies. In October 1997, plaintiffs voluntarily dismissed the Louisiana suit
and filed a substantially similar action in Federal District Court in Worcester,
Massachusetts. In early November 1998, AFC and the plaintiffs entered into a
settlement agreement, to which the court granted preliminary approval on
December 4, 1998. A hearing was held on March 19, 1999 to consider final
approval of the settlement agreement. A decision by the court is expected to be
rendered in the near future. Accordingly, AFLIAC recognized a $21.0 million
pre-tax expense during the third quarter of 1998 related to this litigation.
Although the Company believes that this expense reflects appropriate recognition
of its obligation under the settlement, this estimate assumes the availability
of insurance coverage for certain claims, and the estimate may be revised based
on the amount of reimbursement actually tendered by AFC's insurance carriers, if
any, and based on changes in the Company's estimate of the ultimate cost of the
benefits to be provided to members of the class.
The Company has been named a defendant in various legal proceedings arising in
the normal course of business. In the Company's opinion of, based on the advice
of legal counsel, the ultimate resolution of these proceedings will not have a
material effect on the Company's financial statements. However, liabilities
related to these proceedings could be established in the near term if estimates
of the ultimate resolution of these proceedings are revised.
YEAR 2000
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
Although the Company does not believe that there is a material contingency
associated with the Year 2000 project, there can be no assurance that exposure
for material contingencies will not arise.
13. STATUTORY FINANCIAL INFORMATION
The Company is required to file annual statements with state regulatory
authorities prepared on an accounting basis prescribed or permitted by such
authorities (statutory basis). Statutory surplus differs from shareholder's
equity reported in accordance with generally accepted accounting principles
primarily because policy acquisition costs are expensed when incurred,
investment reserves are based on different assumptions, life insurance reserves
are based on different assumptions and income tax expense reflects only taxes
paid or currently payable. Statutory net income and surplus are as follows:
<TABLE>
<CAPTION>
(IN MILLIONS) 1998 1997 1996
- ------------------------------------------------------------ ------ ------ ------
<S> <C> <C> <C>
Statutory net income........................................ $ (8.2) $ 31.5 $ 5.4
Statutory shareholder's surplus............................. $309.7 $307.1 $234.0
</TABLE>
F-21
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Allmerica Financial Life Insurance and Annuity
Company and the Contractowners of the Allmerica Select Separate Account of
Allmerica Financial Life Insurance and Annuity Company
In our opinion, the accompanying statements of assets and liabilities, and the
related statements of operations and changes in net assets present fairly, in
all material respects, the financial position of each of the Sub-Accounts
constituting the Allmerica Select Separate Account of Allmerica Financial Life
Insurance and Annuity Company at December 31, 1998, the results of each of their
operations and the changes in each of their net assets for each of the periods
indicated, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of Allmerica Financial Life
Insurance and Annuity Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1998 by
correspondence with the Funds, provide a reasonable basis for the opinion
expressed above.
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
March 26, 1999
<PAGE>
ALLMERICA SELECT SEPARATE ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
<TABLE>
<CAPTION>
SELECT
AGGRESSIVE SELECT SELECT GROWTH SELECT
GROWTH GROWTH AND INCOME INCOME
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica
Investment Trust........................... $228,649,110 $336,704,259 $295,912,048 $140,061,555
Investments in shares of Fidelity Variable
Insurance Products Fund (VIP).............. -- -- -- --
Investment in shares of T. Rowe Price
International Series, Inc.................. -- -- -- --
Receivable from Allmerica Financial Life
Insurance and Annuity Company (Sponsor).... -- -- 14,258 --
------------ ------------ ------------- -------------
Total assets.............................. 228,649,110 336,704,259 295,926,306 140,061,555
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and Annuity Company (Sponsor).... 773 51,859 -- 27,082
------------ ------------ ------------- -------------
Net assets................................ $228,648,337 $336,652,400 $295,926,306 $140,034,473
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
Net asset distribution by category:
Qualified variable annuity contracts...... $ 79,475,593 $104,744,491 $ 89,963,271 $ 47,733,147
Non-qualified variable annuity
contracts............................... 149,172,744 231,907,909 205,963,035 92,301,326
------------ ------------ ------------- -------------
$228,648,337 $336,652,400 $295,926,306 $140,034,473
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
Qualified units outstanding, December 31,
1998....................................... 30,135,760 37,503,752 39,252,772 34,826,842
Net asset value per qualified unit, December
31, 1998................................... $ 2.637252 $ 2.792907 $ 2.291896 $ 1.370585
Non-qualified units outstanding, December
31, 1998................................... 56,563,704 83,034,597 89,865,786 67,344,474
Net asset value per non-qualified unit,
December 31, 1998.......................... $ 2.637252 $ 2.792907 $ 2.291896 $ 1.370585
<CAPTION>
SELECT SELECT
MONEY INTERNATIONAL CAPITAL
MARKET EQUITY APPRECIATION
------------ ------------- ------------
<S> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica
Investment Trust........................... $113,859,875 $165,703,596 $102,870,665
Investments in shares of Fidelity Variable
Insurance Products Fund (VIP).............. -- -- --
Investment in shares of T. Rowe Price
International Series, Inc.................. -- -- --
Receivable from Allmerica Financial Life
Insurance and Annuity Company (Sponsor).... -- -- --
------------ ------------- ------------
Total assets.............................. 113,859,875 165,703,596 102,870,665
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and Annuity Company (Sponsor).... 44,786 -- --
------------ ------------- ------------
Net assets................................ $113,815,089 $165,703,596 $102,870,665
------------ ------------- ------------
------------ ------------- ------------
Net asset distribution by category:
Qualified variable annuity contracts...... $ 33,102,121 $ 55,886,977 $34,926,665
Non-qualified variable annuity
contracts............................... 80,712,968 109,816,619 67,944,000
------------ ------------- ------------
$113,815,089 $165,703,596 $102,870,665
------------ ------------- ------------
------------ ------------- ------------
Qualified units outstanding, December 31,
1998....................................... 26,989,026 34,748,214 18,601,998
Net asset value per qualified unit, December
31, 1998................................... $ 1.226503 $ 1.608341 $ 1.877576
Non-qualified units outstanding, December
31, 1998................................... 65,807,394 68,279,437 36,187,084
Net asset value per non-qualified unit,
December 31, 1998.......................... $ 1.226503 $ 1.608341 $ 1.877576
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-1
<PAGE>
ALLMERICA SELECT SEPARATE ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
SELECT SELECT SELECT T. ROWE PRICE
EMERGING VALUE STRATEGIC FIDELITY VIP FIDELITY VIP FIDELITY VIP INTERNATIONAL
MARKETS OPPORTUNITY GROWTH HIGH INCOME EQUITY-INCOME GROWTH STOCK
---------- ----------- ---------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments in shares of
Allmerica Investment Trust... $4,042,580 $18,034,508 $8,392,045 $ -- $ -- $ -- $ --
Investments in shares of
Fidelity Variable Insurance
Products Fund (VIP).......... -- -- -- 101,203,216 178,330,222 147,531,533 --
Investment in shares of T.
Rowe Price International
Series, Inc.................. -- -- -- -- -- -- 57,943,955
Receivable from Allmerica
Financial Life Insurance and
Annuity Company (Sponsor).... -- -- -- -- -- -- --
---------- ----------- ---------- ------------ ------------- ------------ -------------
Total assets.................. 4,042,580 18,034,508 8,392,045 101,203,216 178,330,222 147,531,533 57,943,955
LIABILITIES:
Payable to Allmerica Financial
Life Insurance and Annuity
Company (Sponsor)............ -- -- -- -- -- -- --
---------- ----------- ---------- ------------ ------------- ------------ -------------
Net assets.................... $4,042,580 $18,034,508 $8,392,045 $101,203,216 $178,330,222 $147,531,533 $57,943,955
---------- ----------- ---------- ------------ ------------- ------------ -------------
---------- ----------- ---------- ------------ ------------- ------------ -------------
Net asset distribution by
category:
Qualified variable annuity
contracts................. $1,503,793 $6,034,114 $2,793,756 $ 33,723,717 $ 49,381,970 $ 46,070,951 $17,698,051
Non-qualified variable
annuity contracts......... 2,538,787 12,000,394 5,598,289 67,479,499 128,948,252 101,460,582 40,245,904
---------- ----------- ---------- ------------ ------------- ------------ -------------
$4,042,580 $18,034,508 $8,392,045 $101,203,216 $178,330,222 $147,531,533 $57,943,955
---------- ----------- ---------- ------------ ------------- ------------ -------------
---------- ----------- ---------- ------------ ------------- ------------ -------------
Qualified units outstanding,
December 31, 1998............ 1,937,832 6,102,727 2,899,110 24,987,324 26,455,515 19,690,822 12,662,557
Net asset value per qualified
unit, December 31, 1998...... $ 0.776018 $ 0.988757 $ 0.963660 $ 1.349633 $ 1.866604 $ 2.339717 $ 1.397668
Non-qualified units
outstanding, December 31,
1998......................... 3,271,557 12,136,849 5,809,402 49,998,407 69,081,740 43,364,469 28,795,038
Net asset value per
non-qualified unit, December
31, 1998..................... $ 0.776018 $ 0.988757 $ 0.963660 $ 1.349633 $ 1.866604 $ 2.339717 $ 1.397668
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-2
<PAGE>
ALLMERICA SELECT SEPARATE ACCOUNT
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SELECT
AGGRESSIVE GROWTH SELECT GROWTH
----------------------------- -----------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends.................................. $ -- $ -- $ 217,779 $ 594,234
Mortality and expense risk fees............ (2,636,982) (2,015,705) (3,272,612) (1,909,171)
Administrative expense fees................ (325,919) (249,132) (404,481) (235,965)
------------- ------------- ------------- -------------
Net investment income (loss)............. (2,962,901) (2,264,837) (3,459,314) (1,550,902)
------------- ------------- ------------- -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................. -- 15,267,707 2,708,827 10,519,168
Net realized gain (loss) from sales of
investments.............................. 3,969,770 1,569,746 3,364,057 784,352
------------- ------------- ------------- -------------
Net realized gain (loss)................... 3,969,770 16,837,453 6,072,884 11,303,520
Net unrealized gain (loss)................. 17,405,709 9,062,264 74,575,052 31,295,973
------------- ------------- ------------- -------------
Net realized and unrealized gain
(loss).................................. 21,375,479 25,899,717 80,647,936 42,599,493
------------- ------------- ------------- -------------
Net increase (decrease) in net assets from
operations............................... 18,412,578 23,634,880 77,188,622 41,048,591
------------- ------------- ------------- -------------
CONTRACT TRANSACTIONS:
Net purchase payments...................... 36,061,562 35,797,976 70,613,422 48,274,492
Withdrawals................................ (13,438,781) (7,811,125) (15,891,976) (7,969,058)
Contract benefits.......................... (2,728,888) (1,379,292) (3,404,074) (1,551,120)
Contract charges........................... (89,767) (77,043) (89,116) (62,180)
Transfers between sub-accounts (including
fixed account), net...................... (7,180,823) 11,700,863 266,856 16,263,001
Other transfers from (to) the General
Account.................................. 1,134,404 1,835,272 1,932,745 2,183,627
------------- ------------- ------------- -------------
Net increase (decrease) in net assets from
contract transactions.................... 13,757,707 40,066,651 53,427,857 57,138,762
------------- ------------- ------------- -------------
Net increase (decrease) in net assets...... 32,170,285 63,701,531 130,616,479 98,187,353
NET ASSETS:
Beginning of year.......................... 196,478,052 132,776,521 206,035,921 107,848,568
------------- ------------- ------------- -------------
End of year................................ $ 228,648,337 $ 196,478,052 $ 336,652,400 $ 206,035,921
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
<CAPTION>
SELECT GROWTH AND INCOME
-----------------------------
YEAR ENDED DECEMBER 31,
1998 1997
------------- -------------
<S> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends.................................. $ 3,198,324 $ 2,276,955
Mortality and expense risk fees............ (3,145,481) (2,111,147)
Administrative expense fees................ (388,767) (260,929)
------------- -------------
Net investment income (loss)............. (335,924) (95,121)
------------- -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................. 924,289 18,113,569
Net realized gain (loss) from sales of
investments.............................. 1,064,670 854,942
------------- -------------
Net realized gain (loss)................... 1,988,959 18,968,511
Net unrealized gain (loss)................. 32,750,667 12,001,401
------------- -------------
Net realized and unrealized gain
(loss).................................. 34,739,626 30,969,912
------------- -------------
Net increase (decrease) in net assets from
operations............................... 34,403,702 30,874,791
------------- -------------
CONTRACT TRANSACTIONS:
Net purchase payments...................... 63,681,715 46,842,354
Withdrawals................................ (15,115,743) (8,766,378)
Contract benefits.......................... (4,138,997) (2,390,486)
Contract charges........................... (85,677) (69,205)
Transfers between sub-accounts (including
fixed account), net...................... 106,049 15,332,554
Other transfers from (to) the General
Account.................................. 3,902,001 2,625,475
------------- -------------
Net increase (decrease) in net assets from
contract transactions.................... 48,349,348 53,574,314
------------- -------------
Net increase (decrease) in net assets...... 82,753,050 84,449,105
NET ASSETS:
Beginning of year.......................... 213,173,256 128,724,151
------------- -------------
End of year................................ $ 295,926,306 $ 213,173,256
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-3
<PAGE>
ALLMERICA SELECT SEPARATE ACCOUNT
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
SELECT INCOME MONEY MARKET
---------------------------- ------------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1998 1997 1998 1997
------------- ------------ ------------- --------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends.................................. $ 6,954,415 $ 5,022,772 $ 5,221,319 $ 4,384,109
Mortality and expense risk fees............ (1,469,378) (998,230) (1,211,909) (1,016,141)
Administrative expense fees................ (181,608) (123,377) (149,786) (125,591)
------------- ------------ ------------- --------------
Net investment income (loss)............. 5,303,429 3,901,165 3,859,624 3,242,377
------------- ------------ ------------- --------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................. -- -- -- --
Net realized gain (loss) from sales of
investments.............................. 191,685 22,839 -- --
------------- ------------ ------------- --------------
Net realized gain (loss)................... 191,685 22,839 -- --
Net unrealized gain (loss)................. 575,603 2,251,800 -- --
------------- ------------ ------------- --------------
Net realized and unrealized gain
(loss).................................. 767,288 2,274,639 -- --
------------- ------------ ------------- --------------
Net increase (decrease) in net assets from
operations............................... 6,070,717 6,175,804 3,859,624 3,242,377
------------- ------------ ------------- --------------
CONTRACT TRANSACTIONS:
Net purchase payments...................... 43,005,439 18,288,534 65,100,611 129,227,661
Withdrawals................................ (8,082,420) (4,662,262) (20,168,912) (9,185,006)
Contract benefits.......................... (1,772,510) (1,408,135) (5,486,115) (2,972,579)
Contract charges........................... (37,909) (34,436) (24,776) (23,565)
Transfers between sub-accounts (including
fixed account), net...................... 3,617,459 3,517,315 (7,256,363) (114,998,424)
Other transfers from (to) the General
Account.................................. 3,052,759 1,318,021 645,196 3,070,706
------------- ------------ ------------- --------------
Net increase (decrease) in net assets from
contract transactions.................... 39,782,818 17,019,037 32,809,641 5,118,793
------------- ------------ ------------- --------------
Net increase (decrease) in net assets...... 45,853,535 23,194,841 36,669,265 8,361,170
NET ASSETS:
Beginning of year.......................... 94,180,938 70,986,097 77,145,824 68,784,654
------------- ------------ ------------- --------------
End of year................................ $ 140,034,473 $ 94,180,938 $ 113,815,089 $ 77,145,824
------------- ------------ ------------- --------------
------------- ------------ ------------- --------------
<CAPTION>
SELECT INTERNATIONAL EQUITY
-----------------------------
YEAR ENDED DECEMBER 31,
1998 1997
------------- -------------
<S> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends.................................. $ 2,110,384 $ 2,964,278
Mortality and expense risk fees............ (1,871,430) (1,350,796)
Administrative expense fees................ (231,300) (166,952)
------------- -------------
Net investment income (loss)............. 7,654 1,446,530
------------- -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................. -- 4,123,293
Net realized gain (loss) from sales of
investments.............................. 1,650,381 941,203
------------- -------------
Net realized gain (loss)................... 1,650,381 5,064,496
Net unrealized gain (loss)................. 17,773,061 (4,292,377)
------------- -------------
Net realized and unrealized gain
(loss).................................. 19,423,442 772,119
------------- -------------
Net increase (decrease) in net assets from
operations............................... 19,431,096 2,218,649
------------- -------------
CONTRACT TRANSACTIONS:
Net purchase payments...................... 29,615,052 33,743,058
Withdrawals................................ (8,122,159) (5,026,523)
Contract benefits.......................... (1,791,387) (830,243)
Contract charges........................... (56,589) (45,226)
Transfers between sub-accounts (including
fixed account), net...................... (5,116,809) 16,445,449
Other transfers from (to) the General
Account.................................. 1,294,775 2,131,290
------------- -------------
Net increase (decrease) in net assets from
contract transactions.................... 15,822,883 46,417,805
------------- -------------
Net increase (decrease) in net assets...... 35,253,979 48,636,454
NET ASSETS:
Beginning of year.......................... 130,449,617 81,813,163
------------- -------------
End of year................................ $ 165,703,596 $ 130,449,617
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-4
<PAGE>
ALLMERICA SELECT SEPARATE ACCOUNT
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
SELECT EMERGING
SELECT CAPITAL APPRECIATION MARKETS
---------------------------- ---------------------
YEAR ENDED DECEMBER 31, PERIOD FROM
1998 1997 2/20/98** TO 12/31/98
------------- ------------ ---------------------
<S> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends.................................. $ -- $ -- $ 7,175
Mortality and expense risk fees............ (1,046,274) (636,664) (20,600)
Administrative expense fees................ (129,315) (78,689) (2,546)
------------- ------------ -----------
Net investment income (loss)............... (1,175,589) (715,353) (15,971)
------------- ------------ -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................. 15,561,260 -- --
Net realized gain (loss) from sales of
investments.............................. 1,026,367 122,244 (24,720)
------------- ------------ -----------
Net realized gain (loss)................... 16,587,627 122,244 (24,720)
Net unrealized gain (loss)................. (4,726,710) 8,440,399 (309,858)
------------- ------------ -----------
Net realized and unrealized gain
(loss).................................. 11,860,917 8,562,643 (334,578)
------------- ------------ -----------
Net increase (decrease) in net assets from
operations............................... 10,685,328 7,847,290 (350,549)
------------- ------------ -----------
CONTRACT TRANSACTIONS:
Net purchase payments...................... 25,436,320 23,378,356 3,000,520
Withdrawals................................ (3,623,727) (1,984,458) (61,386)
Contract benefits.......................... (1,106,068) (728,926) (9,898)
Contract charges........................... (30,776) (19,236) (134)
Transfers between sub-accounts (including
fixed account), net...................... (2,261,255) 6,974,304 1,172,968
Other transfers from (to) the General
Account.................................. 654,274 1,663,876 291,059
------------- ------------ -----------
Net increase (decrease) in net assets from
contract transactions.................... 19,068,768 29,283,916 4,393,129
------------- ------------ -----------
Net increase (decrease) in net assets...... 29,754,096 37,131,206 4,042,580
NET ASSETS:
Beginning of year.......................... 73,116,569 35,985,363 --
------------- ------------ -----------
End of year................................ $ 102,870,665 $ 73,116,569 $4,042,580
------------- ------------ -----------
------------- ------------ -----------
<CAPTION>
SELECT VALUE SELECT STRATEGIC
OPPORTUNITY GROWTH
--------------------- ---------------------
PERIOD FROM PERIOD FROM
2/20/98** TO 12/31/98 2/20/98** TO 12/31/98
--------------------- ---------------------
<S> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends.................................. $ 150,189 $ 19,691
Mortality and expense risk fees............ (89,478) (42,877)
Administrative expense fees................ (11,060) (5,300)
--------------------- -----------
Net investment income (loss)............... 49,651 (28,486)
--------------------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................. 25,524 --
Net realized gain (loss) from sales of
investments.............................. (29,187) (151,091)
--------------------- -----------
Net realized gain (loss)................... (3,663) (151,091)
Net unrealized gain (loss)................. 160,234 219,846
--------------------- -----------
Net realized and unrealized gain
(loss).................................. 156,571 68,755
--------------------- -----------
Net increase (decrease) in net assets from
operations............................... 206,222 40,269
--------------------- -----------
CONTRACT TRANSACTIONS:
Net purchase payments...................... 12,809,082 5,671,296
Withdrawals................................ (356,168) (209,854)
Contract benefits.......................... (49,956) (20,535)
Contract charges........................... (478) (338)
Transfers between sub-accounts (including
fixed account), net...................... 4,206,999 2,187,617
Other transfers from (to) the General
Account.................................. 1,218,807 723,590
--------------------- -----------
Net increase (decrease) in net assets from
contract transactions.................... 17,828,286 8,351,776
--------------------- -----------
Net increase (decrease) in net assets...... 18,034,508 8,392,045
NET ASSETS:
Beginning of year.......................... -- --
--------------------- -----------
End of year................................ $18,034,508 $8,392,045
--------------------- -----------
--------------------- -----------
</TABLE>
** Date of initial investment
The accompanying notes are an integral part of these financial statements.
SA-5
<PAGE>
ALLMERICA SELECT SEPARATE ACCOUNT
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
FIDELITY VIP
FIDELITY VIP HIGH INCOME EQUITY-INCOME
---------------------------- -----------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1998 1997 1998 1997
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends.................................. $ 5,463,771 $ 2,360,937 $ 1,609,296 $ 800,519
Mortality and expense risk fees............ (1,129,683) (618,957) (1,802,457) (903,314)
Administrative expense fees................ (139,623) (76,500) (222,776) (111,646)
------------- ------------ ------------- -------------
Net investment income (loss)............. 4,194,465 1,665,480 (415,937) (214,441)
------------- ------------ ------------- -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................. 3,471,771 291,801 5,727,200 4,024,829
Net realized gain (loss) from sales of
investments.............................. (410,592) 153,432 454,647 173,070
------------- ------------ ------------- -------------
Net realized gain (loss)................... 3,061,179 445,233 6,181,847 4,197,899
Net unrealized gain (loss)................. (13,622,064) 5,256,704 7,180,318 11,931,704
------------- ------------ ------------- -------------
Net realized and unrealized gain
(loss)................................. (10,560,885) 5,701,937 13,362,165 16,129,603
------------- ------------ ------------- -------------
Net increase (decrease) in net assets from
operations............................... (6,366,420) 7,367,417 12,946,228 15,915,162
------------- ------------ ------------- -------------
CONTRACT TRANSACTIONS:
Net purchase payments...................... 33,755,346 24,147,277 57,177,724 37,371,024
Withdrawals................................ (4,291,123) (1,540,245) (6,972,862) (3,009,887)
Contract benefits.......................... (1,095,080) (642,692) (1,970,745) (501,372)
Contract charges........................... (24,772) (15,225) (41,629) (24,945)
Transfers between sub-accounts (including
fixed account), net...................... 5,384,061 13,083,846 3,401,689 16,129,962
Other transfers from (to) the General
Account.................................. 1,643,387 1,382,727 3,352,791 2,039,756
------------- ------------ ------------- -------------
Net increase (decrease) in net assets from
contract transactions.................... 35,371,819 36,415,688 54,946,968 52,004,538
------------- ------------ ------------- -------------
Net increase (decrease) in net assets...... 29,005,399 43,783,105 67,893,196 67,919,700
NET ASSETS:
Beginning of year.......................... 72,197,817 28,414,712 110,437,026 42,517,326
------------- ------------ ------------- -------------
End of year................................ $ 101,203,216 $ 72,197,817 $ 178,330,222 $ 110,437,026
------------- ------------ ------------- -------------
------------- ------------ ------------- -------------
<CAPTION>
T. ROWE PRICE
FIDELITY VIP INTERNATIONAL
GROWTH STOCK
---------------------------- ---------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1998 1997 1998 1997
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends.................................. $ 413,212 $ 255,385 $ 663,390 $ 380,324
Mortality and expense risk fees............ (1,334,435) (685,823) (627,152) (394,964)
Administrative expense fees................ (164,930) (84,765) (77,513) (48,816)
------------- ------------ ------------ ------------
Net investment income (loss)............. (1,086,153) (515,203) (41,275) (63,456)
------------- ------------ ------------ ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................. 10,808,765 1,143,150 234,138 538,793
Net realized gain (loss) from sales of
investments.............................. 1,061,177 252,760 151,115 932,107
------------- ------------ ------------ ------------
Net realized gain (loss)................... 11,869,942 1,395,910 385,253 1,470,900
Net unrealized gain (loss)................. 25,112,290 9,153,516 5,788,775 (1,612,907)
------------- ------------ ------------ ------------
Net realized and unrealized gain
(loss)................................. 36,982,232 10,549,426 6,174,028 (142,007)
------------- ------------ ------------ ------------
Net increase (decrease) in net assets from
operations............................... 35,896,079 10,034,223 6,132,753 (205,463)
------------- ------------ ------------ ------------
CONTRACT TRANSACTIONS:
Net purchase payments...................... 35,768,091 26,585,405 14,149,159 16,331,917
Withdrawals................................ (5,164,629) (2,025,514) (2,057,947) (1,619,234)
Contract benefits.......................... (1,505,737) (774,277) (649,684) (397,243)
Contract charges........................... (37,556) (22,196) (18,009) (11,423)
Transfers between sub-accounts (including
fixed account), net...................... 3,426,882 8,237,545 (1,989,024) 6,388,208
Other transfers from (to) the General
Account.................................. 1,296,933 1,256,357 812,777 1,212,597
------------- ------------ ------------ ------------
Net increase (decrease) in net assets from
contract transactions.................... 33,783,984 33,257,320 10,247,272 21,904,822
------------- ------------ ------------ ------------
Net increase (decrease) in net assets...... 69,680,063 43,291,543 16,380,025 21,699,359
NET ASSETS:
Beginning of year.......................... 77,851,470 34,559,927 41,563,930 19,864,571
------------- ------------ ------------ ------------
End of year................................ $ 147,531,533 $ 77,851,470 $ 57,943,955 $ 41,563,930
------------- ------------ ------------ ------------
------------- ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-6
<PAGE>
ALLMERICA SELECT SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION
Allmerica Select Separate Account (Allmerica Select) is a separate
investment account of Allmerica Financial Life Insurance and Annuity Company
(the Company), established on March 5, 1992 for the purpose of separating from
the general assets of the Company those assets used to fund certain variable
annuity contracts issued by the Company. The Company is a wholly-owned
subsidiary of First Allmerica Financial Life Insurance Company (First
Allmerica). First Allmerica is a wholly-owned subsidiary of Allmerica Financial
Corporation (AFC). Under applicable insurance law, the assets and liabilities of
Allmerica Select are clearly identified and distinguished from the other assets
and liabilities of the Company. Allmerica Select cannot be charged with
liabilities arising out of any other business of the Company.
Allmerica Select is registered as a unit investment trust under the
Investment Company Act of 1940, as amended (the 1940 Act). Allmerica Select
currently offers fourteen Sub-Accounts. Each Sub-Account invests exclusively in
a corresponding investment portfolio of the Allmerica Investment Trust (the
Trust) managed by Allmerica Financial Investment Management Services, Inc.
(AFIMS) (successor to Allmerica Investment Management Company, Inc.), a
wholly-owned subsidiary of First Allmerica; or of the Variable Insurance
Products Fund (Fidelity VIP) managed by Fidelity Management & Research Company
(FMR); or of the T. Rowe Price International Series, Inc. (T. Rowe Price)
managed by Rowe Price-Fleming International, Inc. The Trust, Fidelity VIP, and
T. Rowe Price (the Funds) are open-end, diversified management investment
companies registered under the 1940 Act.
Allmerica Select funds two types of variable annuity contracts, "qualified"
contracts and "non-qualified" contracts. A qualified contract is one that is
purchased in connection with a retirement plan which meets the requirements of
Section 401, 403, or 408 of the Internal Revenue Code (the Code), while a
non-qualified contract is one that is not purchased in connection with one of
the indicated retirement plans. The tax treatment for certain withdrawals or
surrenders will vary according to whether they are made from a qualified
contract or a non-qualified contract.
Certain prior year balances have been reclassified to conform with current
year presentation.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS -- Security transactions are recorded on the trade date.
Investments held by the Sub-Accounts are stated at the net asset value per share
of the respective investment portfolio of the Funds. Net realized gains and
losses on securities sold are determined using the average cost method.
Dividends and capital gain distributions are recorded on the ex-dividend date
and are reinvested in additional shares of the respective investment portfolio
of the Funds at net asset value.
FEDERAL INCOME TAXES -- The Company is taxed as a "life insurance company"
under Subchapter L of the Code and files a consolidated federal income tax
return with First Allmerica. The Company anticipates no tax liability resulting
from the operations of Allmerica Select. Therefore, no provision for income
taxes has been charged against Allmerica Select.
SA-7
<PAGE>
ALLMERICA SELECT SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- INVESTMENTS
The number of shares owned, aggregate cost, and net asset value per share of
each Sub-Account's investment in the Funds at December 31, 1998 were as follows:
<TABLE>
<CAPTION>
PORTFOLIO INFORMATION
-----------------------------------
NET
ASSET
VALUE
NUMBER OF AGGREGATE PER
INVESTMENT PORTFOLIO SHARES COST SHARE
- ---------------------------------------- ----------- ------------ --------
<S> <C> <C> <C>
Select Aggressive Growth.............. . 92,946,793 $176,479,934 $ 2.460
Select Growth........................... 138,675,560 219,038,878 2.428
Select Growth and Income................ 166,336,171 231,011,231 1.779
Select Income........................... 135,718,561 137,625,649 1.032
Money Market............................ 113,859,875 113,859,875 1.000
Select International Equity............. 107,460,179 138,459,337 1.542
Select Capital Appreciation............. 62,726,015 98,278,605 1.640
Select Emerging Markets................. 5,156,352 4,352,438 0.784
Select Value Opportunity................ 10,702,972 17,874,274 1.685
Select Strategic Growth................. 8,624,918 8,172,199 0.973
Fidelity VIP High Income................ 8,777,382 108,048,761 11.530
Fidelity VIP Equity-Income.............. 7,015,351 155,707,691 25.420
Fidelity VIP Growth..................... 3,287,977 111,568,787 44.870
T. Rowe Price International Stock....... 3,990,630 52,472,892 14.520
</TABLE>
NOTE 4 -- RELATED PARTY TRANSACTIONS
The Company makes a charge of 1.25% per annum based on the average daily net
assets of each Sub-Account at each valuation date for mortality and expense
risks. The Company also charges each Sub-Account 0.15% per annum based on the
average daily net assets of each Sub-Account for administrative expenses. These
charges are deducted from the daily value of each Sub-Account and are paid to
the Company on a daily basis.
For contracts issued on Form A3020-92 (Allmerica Select Resource I), a
contract fee is deducted on the contract anniversary and upon full surrender of
the contract. For contracts issued on Form A3025-96 (Allmerica Select Resource
II), a contract fee is deducted on the contract anniversary and upon full
surrender if the accumulated value is less than $50,000. The fee is currently
waived for Allmerica Select Resource II contracts issued to and maintained by
the trustee of a 401(k) plan.
Allmerica Investments, Inc. (Allmerica Investments), a wholly-owned
subsidiary of First Allmerica, is principal underwriter and general distributor
of Allmerica Select, and does not receive any compensation for sales of the
contracts. Commissions are paid by the Company to registered representatives of
certain independent broker-dealers. The Allmerica Select Resource I and II
contracts have a contingent deferred sales charge and no deduction is made for
sales charges at the time of the sale. For the years ended December 31, 1998 and
1997, the Company received $1,530,964 and $793,493, respectively, for contingent
deferred sales charges applicable to Allmerica Select Separate Account.
SA-8
<PAGE>
ALLMERICA SELECT SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- CONTRACTOWNERS AND SPONSOR TRANSACTIONS
Transactions from contractowners and sponsor were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997
------------------------------ -----------------------------
UNITS AMOUNT UNITS AMOUNT
------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Select Aggressive Growth
Issuance of Units.......................... 28,443,354 $ 71,461,752 33,846,682 $ 75,147,109
Redemption of Units........................ (22,974,119) (57,704,045) (16,878,413) (35,080,458)
------------- -------------- ------------- -------------
Net increase (decrease).................. 5,469,235 $ 13,757,707 16,968,269 $ 40,066,651
------------- -------------- ------------- -------------
------------- -------------- ------------- -------------
Select Growth
Issuance of Units.......................... 48,669,777 $ 117,987,024 46,267,945 $ 85,189,100
Redemption of Units........................ (26,664,319) (64,559,167) (15,928,340) (28,050,338)
------------- -------------- ------------- -------------
Net increase (decrease).................. 22,005,458 $ 53,427,857 30,339,605 $ 57,138,762
------------- -------------- ------------- -------------
------------- -------------- ------------- -------------
Select Growth and Income
Issuance of Units.......................... 45,914,205 $ 99,392,688 44,731,254 $ 80,982,519
Redemption of Units...................... . (23,587,262) (51,043,340) (15,854,780) (27,408,205)
------------- -------------- ------------- -------------
Net increase (decrease).................. 22,326,943 $ 48,349,348 28,876,474 $ 53,574,314
------------- -------------- ------------- -------------
------------- -------------- ------------- -------------
Select Income
Issuance of Units.......................... 59,979,984 $ 80,651,018 28,213,650 $ 34,575,615
Redemption of Units...................... . (30,202,528) (40,868,200) (14,565,754) (17,556,578)
------------- -------------- ------------- -------------
Net increase (decrease)................ . 29,777,456 $ 39,782,818 13,647,896 $ 17,019,037
------------- -------------- ------------- -------------
------------- -------------- ------------- -------------
Money Market
Issuance of Units.......................... 160,175,464 $ 193,712,183 184,460,786 $ 205,139,510
Redemption of Units...................... . (132,822,470) (160,902,542) (179,708,703) (200,020,717)
------------- -------------- ------------- -------------
Net increase (decrease).................. 27,352,994 $ 32,809,641 4,752,083 $ 5,118,793
------------- -------------- ------------- -------------
------------- -------------- ------------- -------------
Select International Equity
Issuance of Units.......................... 35,836,093 $ 56,782,369 50,880,736 $ 70,478,183
Redemption of Units........................ (25,978,288) (40,959,486) (18,015,151) (24,060,378)
------------- -------------- ------------- -------------
Net increase (decrease).................. 9,857,805 $ 15,822,883 32,865,585 $ 46,417,805
------------- -------------- ------------- -------------
------------- -------------- ------------- -------------
Select Capital Appreciation
Issuance of Units.......................... 25,684,264 $ 44,175,487 29,860,999 $ 43,787,971
Redemption of Units...................... . (14,627,907) (25,106,719) (10,385,180) (14,504,055)
------------- -------------- ------------- -------------
Net increase (decrease).................. 11,056,357 $ 19,068,768 19,475,819 $ 29,283,916
------------- -------------- ------------- -------------
------------- -------------- ------------- -------------
Select Emerging Markets
Issuance of Units.......................... 6,117,004 $ 5,235,588 -- $ --
Redemption of Units........................ (907,615) (842,459) -- --
------------- -------------- ------------- -------------
Net increase (decrease).................. 5,209,389 $ 4,393,129 -- $ --
------------- -------------- ------------- -------------
------------- -------------- ------------- -------------
</TABLE>
SA-9
<PAGE>
ALLMERICA SELECT SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- CONTRACTOWNERS AND SPONSOR TRANSACTIONS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997
------------------------------ -----------------------------
UNITS AMOUNT UNITS AMOUNT
------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Select Value Opportunity
Issuance of Units.......................... 20,566,820 $ 20,586,826 -- $ --
Redemption of Units........................ (2,327,244) (2,758,540) -- --
------------- -------------- ------------- -------------
Net increase (decrease).................. 18,239,576 $ 17,828,286 -- $ --
------------- -------------- ------------- -------------
------------- -------------- ------------- -------------
Select Strategic Growth
Issuance of Units.......................... 10,583,703 $ 10,307,180 -- $ --
Redemption of Units........................ (1,875,191) (1,955,404) -- --
------------- -------------- ------------- -------------
Net increase (decrease).................. 8,708,512 $ 8,351,776 -- $ --
------------- -------------- ------------- -------------
------------- -------------- ------------- -------------
Fidelity VIP High Income
Issuance of Units.......................... 42,299,742 $ 60,272,832 40,320,288 $ 52,914,842
Redemption of Units........................ (17,784,384) (24,901,013) (12,900,932) (16,499,154)
------------- -------------- ------------- -------------
Net increase (decrease).................. 24,515,358 $ 35,371,819 27,419,356 $ 36,415,688
------------- -------------- ------------- -------------
------------- -------------- ------------- -------------
Fidelity VIP Equity-Income
Issuance of Units.......................... 48,319,788 $ 87,225,760 44,976,217 $ 67,922,420
Redemption of Units........................ (17,913,028) (32,278,792) (11,526,295) (15,917,882)
------------- -------------- ------------- -------------
Net increase (decrease).................. 30,406,760 $ 54,946,968 33,449,922 $ 52,004,538
------------- -------------- ------------- -------------
------------- -------------- ------------- -------------
Fidelity VIP Growth
Issuance of Units.......................... 32,964,840 $ 65,335,816 29,081,173 $ 44,906,335
Redemption of Units...................... . (15,681,080) (31,551,832) (8,054,427) (11,649,015)
------------- -------------- ------------- -------------
Net increase (decrease).................. 17,283,760 $ 33,783,984 21,026,746 $ 33,257,320
------------- -------------- ------------- -------------
------------- -------------- ------------- -------------
T. Rowe Price International Stock
Issuance of Units.......................... 17,721,810 $ 23,965,360 32,358,642 $ 40,274,630
Redemption of Units...................... . (10,241,106) (13,718,088) (14,891,726) (18,369,808)
------------- -------------- ------------- -------------
Net increase (decrease).................. 7,480,704 $ 10,247,272 17,466,916 $ 21,904,822
------------- -------------- ------------- -------------
------------- -------------- ------------- -------------
</TABLE>
NOTE 6 -- DIVERSIFICATION REQUIREMENTS
Under the provisions of Section 817(h) of the Code, a variable annuity
contract, other than a contract issued in connection with certain types of
employee benefit plans, will not be treated as an annuity contract for federal
income tax purposes for any period for which the investments of the segregated
asset account on which the contract is based are not adequately diversified. The
Code provides that the "adequately diversified" requirement may be met if the
underlying investments satisfy either a statutory safe harbor test or
diversification requirements set forth in regulations issued by the Secretary of
The Treasury.
The Internal Revenue Service has issued regulations under Section 817(h) of
the Code. The Company believes that Allmerica Select satisfies the current
requirements of the regulations, and it intends that Allmerica Select will
continue to meet such requirements.
SA-10
<PAGE>
ALLMERICA SELECT SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of shares of the Funds by
Allmerica Select during the year ended December 31, 1998 were as follows:
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO PURCHASES SALES
- ------------------------------------------------------- ------------ ------------
<S> <C> <C>
Select Aggressive Growth............................... $ 31,905,921 $ 21,116,601
Select Growth.......................................... 66,752,075 14,023,151
Select Growth and Income............................... 56,761,065 7,853,839
Select Income.......................................... 52,061,641 6,948,820
Money Market........................................... 101,896,643 65,179,446
Select International Equity............................ 28,715,202 12,884,665
Select Capital Appreciation............................ 42,248,036 8,793,597
Select Emerging Markets................................ 4,586,750 209,592
Select Value Opportunity............................... 19,115,410 1,211,949
Select Strategic Growth................................ 9,437,611 1,114,321
Fidelity VIP High Income............................... 50,494,226 7,456,171
Fidelity VIP Equity-Income............................. 66,365,787 6,107,556
Fidelity VIP Growth.................................... 52,632,705 9,126,109
T. Rowe Price International Stock...................... 14,266,496 3,826,362
------------ ------------
Totals............................................... $597,239,568 $165,852,179
------------ ------------
------------ ------------
</TABLE>
SA-11
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS
Financial Statements Included in Part A
None
Financial Statements Included in Part B
Financial Statements for Allmerica Financial Life Insurance and Annuity
Company
Financial Statements for Allmerica Select Separate Account of Allmerica
Financial Life Insurance and Annuity Company
Financial Statements Included in Part C
None
(b) EXHIBITS
EXHIBIT 1 Vote of Board of Directors Authorizing Establishment of
Registrant dated March 5, 1992 was previously filed on
April 24, 1998 (Registration Statement No. 811-6632) in
Post-Effective Amendment No. 16, and is incorporated by
reference herein.
EXHIBIT 2 Not Applicable. Pursuant to Rule 26a-2, the Insurance Company
may hold the assets of the Registrant NOT pursuant to a trust
indenture or other such instrument.
EXHIBIT 3 (a) Underwriting and Administrative Services Agreement was
previously filed on April 24, 1998 (Registration Statement
No. 811-6632) in Post-Effective Amendment No. 16, and is
incorporated by reference herein.
(b) Form of Revised Commission schedule was previously filed
on September 9, 1998 in Registrant's Initial Registration
Statement, and is incorporated by reference herein. Sales
Agreements (Select) with Commission Schedule were
previously filed on April 24, 1998 (Registration Statement
No. 811-6632) in Post-Effective Amendment No. 16, and are
incorporated by reference herein.
(c) General Agent's Agreement was previously filed on
April 24, 1998 (Registration Statement No. 811-6632) in
Post-Effective Amendment No. 16, and is incorporated by
reference herein.
(d) Career Agent Agreement was previously filed on
April 24, 1998 (Registration Statement No. 811-6632) in
Post-Effective Amendment No. 16, and is incorporated by
reference herein.
(e) Registered Representative's Agreement was previously filed
on April 24, 1998 (Registration Statement No. 811-6632)
in Post-Effective Amendment No. 16, and is incorporated by
reference herein.
<PAGE>
EXHIBIT 4 Minimum Guaranteed Annuity Payout Rider was previously filed on
December 29, 1998 in Post-Effective Amendment No. 1, and is
incorporated by reference herein. Contract Form 3027-98 was
previously filed on December 8, 1998 in Registrant's
Pre-Effective Amendment No. 1, and is incorporated by
reference herein.
EXHIBIT 5 Draft Application Form AS-495 was previously filed on
December 8, 1998 in Registrant's Pre-Effective Amendment
No. 1, and is incorporated by reference herein.
EXHIBIT 6 The Depositor's Articles of Incorporation, and Bylaws, as
amended to reflect its name change, were previously filed on
September 29, 1995 in Post-Effective Amendment No. 7, and are
incorporated by reference herein.
EXHIBIT 7 Not Applicable.
EXHIBIT 8 (a) Fidelity Service Agreement was previously filed on
April 30, 1996 in Post-Effective No. 8, and is incorporated
by reference herein.
(b) An amendment to the Fidelity Service Agreement, effective
as of January 1,1997, was previously filed on April 30,
1997 in Post-Effective Amendment No. 12, and is
incorporated by reference herein.
(c) Fidelity Service Contract, effective as of January 1,
1997, was previously filed on April 30, 1997 in
Post-Effective Amendment No. 12, and is incorporated by
reference herein.
(d) T. Rowe Price Service Agreement was previously filed on
April 24, 1998 in Registration Statement No. 81-6632,
Post-Effective Amendment No. 16, and is incorporated by
reference herein.
(e) BFDS Agreements for lockbox and mailroom services were
previously filed on April 24, 1998 (Registration Statement
No. 811-6632) in Post-Effective Amendment No. 16, and are
incorporated by reference herein.
(f) Directors' Power of Attorney is filed herewith.
EXHIBIT 9 Opinion of Counsel is filed herewith.
EXHIBIT 10 Consent of Independent Accountants is filed herewith.
EXHIBIT 11 None.
EXHIBIT 12 None.
EXHIBIT 13 Not Applicable.
EXHIBIT 14 Not Applicable.
EXHIBIT 15 (a) Participation Agreement between the Company and Allmerica
Investment Trust was previously filed on April 24, 1998
(Registration Statement No. 811-6632) in Post-Effective
Amendment No. 16, and is incorporated by reference herein.
<PAGE>
(b) Participation Agreement between the Company and Fidelity
VIP, as amended, was previously filed on April 24, 1998
(Registration Statement No. 811-6632) in Post-Effective
Amendment No. 16, and is incorporated by reference herein.
(c) Participation Agreement between the Company and T. Rowe
Price International Series, Inc. was previously filed on
April 24, 1998 (Registration Statement No. 811-6632) in
Post-Effective Amendment No. 16, and is incorporated by
reference herein.
ITEM 25. DIRECTORS AND EXECUTIVE OFFICERS OF THE DEPOSITOR
The principal business address of all the following Directors and Officers
is:
440 Lincoln Street
Worcester, Massachusetts 01653
DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY
<TABLE>
<CAPTION>
NAME AND POSITION WITH COMPANY PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS
<S> <C>
- ------------------------------ ----------------------------------------------
Bruce C. Anderson Director (since 1996), Vice President (since 1984) and Assistant
Director Secretary (since 1992) of First Allmerica
Abigail M. Armstrong Secretary (since 1996) and Counsel (since 1991) of First
Secretary and Counsel Allmerica; Secretary (since 1988) and Counsel (since 1994) of
Allmerica Investments, Inc.; and Secretary (since 1990) of
Allmerica Financial Investment Management Services, Inc.
Warren E. Barnes Vice President (since 1996) and Corporate Controller (since
Vice President and 1998) of First Allmerica
Corporate Controller
Robert E. Bruce Director and Chief Information Officer (since 1997) and Vice
Director and Chief Information President (since 1995) of First Allmerica; and Corporate
Officer Manager (1979 to 1995) of Digital Equipment Corporation
John P. Kavanaugh Director and Chief Investment Officer (since 1996) and Vice
Director, Vice President and President (since 1991) of First Allmerica; and Vice President
Chief Investment Officer (since 1998) of Allmerica Financial Investment Management
Services, Inc.
John F. Kelly Director (since 1996), Senior Vice President (since 1986),
Director, Vice President and General Counsel (since 1981) and Assistant Secretary (since
General Counsel 1991) of First Allmerica; Director (since 1985) of Allmerica
Investments, Inc.; and Director (since 1990) of Allmerica
Financial Investment Management Services, Inc.
J. Barry May Director (since 1996) of First Allmerica; Director and
Director President (since 1996) of The Hanover Insurance Company; and
Vice President (1993 to 1996) of The Hanover Insurance Company
James R. McAuliffe Director (since 1996) of First Allmerica; Director (since 1992),
Director President (since 1994) and Chief Executive Officer (since 1996)
of Citizens Insurance Company of America
<PAGE>
John F. O'Brien Director, President and Chief Executive Officer (since 1989) of
Director and Chairman of First Allmerica; Director (since 1989) of Allmerica Investments,
the Board Inc.; and Director and Chairman of the Board (since 1990) of
Allmerica Financial Investment Management Services, Inc.
Edward J. Parry, III Director and Chief Financial Officer (since 1996) and Vice
Director, Vice President, President and Treasurer (since 1993) of First Allmerica;
Chief Financial Officer and Treasurer (since 1993) of Allmerica Investments, Inc.; and
Treasurer Treasurer (since 1993) of Allmerica Financial Investment
Management Services, Inc.
Richard M. Reilly Director (since 1996) and Vice President (since 1990) of First
Director, President and Allmerica; Director (since 1990) of Allmerica Investments, Inc.;
Chief Executive Officer and Director and President (since 1998) of Allmerica Financial
Investment Management Services, Inc.
Robert P. Restrepo, Jr. Director and Vice President (since 1998) of First Allmerica;
Director Chief Executive Officer (1996 to 1998) of Travelers Property &
Casualty; Senior Vice President (1993 to 1996) of Aetna Life &
Casualty Company
Eric A. Simonsen Director (since 1996) and Vice President (since 1990) of
Director and Vice President First Allmerica; Director (since 1991) of Allmerica
Investments, Inc.; and Director (since 1991) of Allmerica
Financial Investment Management Services, Inc.
Phillip E. Soule Director (since 1996) and Vice President (since 1987) of First
Director Allmerica
</TABLE>
<PAGE>
ITEM 26. PERSONS UNDER COMMON CONTROL WITH REGISTRANT
<TABLE>
<CAPTION>
<S><C>
Allmerica Financial Corporation
Delaware
| | | | | | |
______________________________________________________________________________________________________________
Financial 100% 100% 100% 100% 100% 100%
Profiles, Inc. Allmerica, Inc. Allmerica First Allmerica AFC Capital Allmerica First Sterling
Funding Corp. Financial Life Trust I Services Limited
Insurance Corporation
Company
California Massachusetts Massachusetts Massachusetts Delaware Massachusetts Bermuda
| |
30% _________________ _____________
| |
100% 100%
SMA First Sterling
Financial Corp. Reinsurance
Company
Limited
Massachusetts Bermuda
|
______________________________________________________________________________________________________________________
| | | | | |
70% 100% 99.2% 100% 100% 100%
Allmerica Sterling Risk Allmerica Allmerica Allmerica Allmerica
Property Management Trust Investments, Financial Financial Life
& Casualty Services, Inc. Company, N.A. Inc. Investment Insurance and
Companies, Inc. Management Annuity Company
Services, Inc.
Federally
Delaware Delaware Chartered Massachusetts Massachusetts Delaware
|
___________________________________________________________________________
| | | |
100% 100% 100% 100%
APC The Hanover Allmerica Citizens
Funding Corp. Insurance Financial Insurance
Company Insurance Company of
Brokers, Inc. Illinois
Massachusetts New Hampshire Massachusetts Illinois
|
______________________________________________________________________________________________________________________
| | | | |
100% 100% 100% 100% 82.5% 100%
Allmerica Allmerica The Hanover Hanover Texas Citizens Massachusetts
Financial Plus American Insurance Corporation Bay Insurance
Benefit Insurance Insurance Management Company
Insurance Agency, Inc. Company Company, Inc.
Company
Pennsylvania Massachusetts New Hampshire Texas Delaware New Hampshire
|
________________________________________________________
| | |
100% 100% 100%
Citizens Citizens Insurance Citizens
Insurance Company of Insurance
Company of Ohio America Company of the
Midwest
Ohio Michigan Indiana
|
_______________
100%
Citizens
Management Inc.
Michigan
</TABLE>
<TABLE>
<CAPTION>
<S><C>
Allmerica Financial Corporation
Delaware
| | | | | | |
_______________________________________________________________________________________________________________________
Financial 100% 100% 100% 100% 100% 100%
Profiles, Inc. Allmerica, Inc. Allmerica First Allmerica AFC Capital Allmerica First Sterling
Funding Corp. Financial Life Trust I Services Limited
Insurance Corporation
Company
California Massachusetts Massachusetts Massachusetts Delaware Massachusetts Bermuda
| |
_____________________________________________________________________________________________________________________
| | | | |
100% 100% 100% 100% 100%
Allmerica Allmerica Allmerica Allmerica Allmerica
Investment Asset Financial Services Asset Benefits
Management Management, Insurance Management, Inc.
Company, Inc. Inc. Agency, Inc. Limited
Massachusetts Massachusetts Massachusetts Bermuda Florida
________________ _________________________________
Allmerica Equity Greendale AAM
Index Pool Special Equity Fund
Placements
Fund
Massachusetts Massachusetts Massachusetts
_____________________________________
| | -------------- Grantor Trusts established for the benefit of First
100% 100% Allmerica, Allmerica Financial Life, Hanover and
Allmerica AMGRO, Inc. Citizens
Financial Allmerica Allmerica
Alliance Investment Trust Securities
Insurance Trust
Company
Massachusetts Massachusetts
New Hampshire Massachusetts
|
_______________
|
100% -------------- Affiliated Management Investment Companies
Lloyds
Credit Hanover Lloyd's
Corporation Insurance
Company
Massachusetts Texas
-------------- Affiliated Lloyd's plan company, controlled by
Underwriters for the benefit of The Hanover
Insurance Company
AAM AAM
Growth & High
Income Fund Yield Fund,
L.P. L.L.C.
Delaware Massachusetts
-------------- L.P. or L.L.C. established for the benefit of
First Allmerica, Allmerica
Financial Life, Hanover and
Citizens
</TABLE>
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
<TABLE>
<CAPTION>
NAME ADDRESS TYPE OF BUSINESS
<S> <C> <C>
---- ------- ----------------
AAM Equity Fund 440 Lincoln Street Massachusetts Grantor Trust
Worcester MA 01653
AAM Growth & Income Fund, L.P. 440 Lincoln Street Limited Partnership
Worcester MA 01653
AFC Capital Trust I 440 Lincoln Street Statutory Business Trust
Worcester MA 01653
Allmerica Asset Management Limited 440 Lincoln Street Investment advisory services
Worcester MA 01653
Allmerica Asset Management, Inc. 440 Lincoln Street Investment advisory services
Worcester MA 01653
Allmerica Benefits, Inc. 440 Lincoln Street
Worcester MA 01653 Non-insurance medical services
Allmerica Equity Index Pool 440 Lincoln Street
Worcester MA 01653 Massachusetts Grantor Trust
Allmerica Financial Alliance 100 North Parkway Multi-line property and
Insurance Company Worcester MA 01605 casualty insurance
Allmerica Financial Benefit 100 North Parkway Multi-line property and
Insurance Company Worcester MA 01605 casualty insurance
Allmerica Financial Corporation 440 Lincoln Street Holding Company
Worcester MA 01653
Allmerica Financial Insurance 440 Lincoln Street Insurance Broker
Brokers, Inc. Worcester MA 01653
Allmerica Financial Life Insurance 440 Lincoln Street Life insurance, accident and
and Annuity Company (formerly known Worcester MA 01653 health insurance, annuities,
as SMA Life Assurance Company) variable annuities and
variable life insurance
Allmerica Financial Services 440 Lincoln Street Insurance Agency
Insurance Agency, Inc. Worcester MA 01653
Allmerica Funding Corp. 440 Lincoln Street Special purpose funding
Worcester MA 01653 vehicle for commercial paper
Allmerica, Inc. 440 Lincoln Street Common employer for
Worcester MA 01653 Allmerica Financial
Corporation entities
<PAGE>
Allmerica Financial Investment 440 Lincoln Street Investment advisory services
Management Services, Inc. Worcester MA 01653
(formerly known as Allmerica
Institutional Services, Inc. and 440
Financial Group of Worcester, Inc.)
Allmerica Investment Management 440 Lincoln Street Investment advisory services
Company, Inc. Worcester MA 01653
Allmerica Investments, Inc. 440 Lincoln Street Securities, retail broker-
Worcester MA 01653 dealer
Allmerica Investment Trust 440 Lincoln Street Investment Company
Worcester MA 01653
Allmerica Plus Insurance 440 Lincoln Street Insurance Agency
Agency, Inc. Worcester MA 01653
Allmerica Property & Casualty 440 Lincoln Street Holding Company
Companies, Inc. Worcester MA 01653
Allmerica Securities Trust 440 Lincoln Street Investment Company
Worcester MA 01653
Allmerica Services Corporation 440 Lincoln Street Internal administrative
Worcester MA 01653 services provider to
Allmerica Financial
Corporation entities
Allmerica Trust Company, N.A. 440 Lincoln Street Limited purpose national
Worcester MA 01653 trust company
AMGRO, Inc. 100 North Parkway Premium financing
Worcester MA 01605
Citizens Corporation 440 Lincoln Street Holding Company
Worcester MA 01653
Citizens Insurance Company 645 West Grand River Multi-line property and
of America Howell MI 48843 casualty insurance
Citizens Insurance Company 333 Pierce Road Multi-line property and
of Illinois Itasca IL 60143 casualty insurance
Citizens Insurance Company 3950 Priority Way Multi-line property and
of the Midwest South Drive, Suite 200 casualty insurance
Indianapolis IN 46280
Citizens Insurance Company 8101 N. High Street Multi-line property and
of Ohio P.O. Box 342250 casualty insurance
Columbus OH 43234
Citizens Management, Inc. 645 West Grand River Services management
Howell MI 48843 company
Financial Profiles 5421 Avenida Encinas Computer software company
Carlsbad, CA 92008
First Allmerica Financial Life 440 Lincoln Street Life, pension, annuity,
Insurance Company (formerly Worcester MA 01653 accident and health
State Mutual Life Assurance insurance company
Company of America)
First Sterling Limited 440 Lincoln Street Holding Company
Worcester MA 01653
First Sterling Reinsurance Company 440 Lincoln Street Reinsurance Company
Limited Worcester MA 01653
Greendale Special Placements Fund 440 Lincoln Street Massachusetts Grantor Trust
Worcester MA 01653
The Hanover American Insurance 100 North Parkway Multi-line property and
Company Worcester MA 01605 casualty insurance
The Hanover Insurance Company 100 North Parkway Multi-line property and
Worcester MA 01605 casualty insurance
<PAGE>
Hanover Texas Insurance 801 East Campbell Road Attorney-in-fact for Hanover
Management Company, Inc. Richardson TX 75081 Lloyd's Insurance Company
Hanover Lloyd's Insurance Company 801 East Campbell Road Multi-line property and
Richardson TX 75081 casualty insurance
Lloyds Credit Corporation 440 Lincoln Street Premium financing service
Worcester MA 01653 franchises
Massachusetts Bay Insurance 100 North Parkway Multi-line property and
Company Worcester MA 01605 casualty insurance
SMA Financial Corp. 440 Lincoln Street Holding Company
Worcester MA 01653
Sterling Risk Management 440 Lincoln Street Risk management services
Services, Inc. Worcester MA 01653
</TABLE>
ITEM 27. NUMBER OF CONTRACT OWNERS
As of February 28, 1999, there were 13,131 Contract holders of qualified
Contracts and 19,223 Contract holders of non-qualified Contracts.
ITEM 28. INDEMNIFICATION
Article VIII of the Bylaws of Allmerica Financial Life Insurance and
Annuity Company (the Depositor) state: Each Director and each Officer of
the Corporation, whether or not in office, (and his executors or
administrators), shall be indemnified or reimbursed by the Corporation
against all expenses actually and necessarily incurred by him in the
defense or reasonable settlement of any action, suit, or proceeding in
which he is made a party by reason of his being or having been a Director
or Officer of the Corporation, including any sums paid in settlement or to
discharge judgment, except in relation to matters as to which he shall be
finally adjudged in such action, suit or proceeding to be liable for
negligence or misconduct in the performance of his duties as such Director
or Officer; and the foregoing right of indemnification or reimbursement
shall not affect any other rights to which he may be entitled under the
Articles of Incorporation, any statute, bylaw, agreement, vote of
stockholders, or otherwise.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Allmerica Investments, Inc. also acts as principal underwriter
for the following:
X VEL Account, VEL II Account, VEL Account III, Select Account III,
Inheiritage Account, Separate Accounts VA-A, VA-B, VA-C, VA-G,
VA-H, VA-K. VA-P, Allmerica Select Separate Account II, Group
VEL Account, Separate Account KG, Separate Account KGC, Fulcrum
Separate Account, Fulcrum Variable Life Separate Account, and
Allmerica Select Separate Account of Allmerica Financial Life
Insurance and Annuity Company
X Inheiritage Account, VEL II Account, Separate Account I, Separate
Account VA-K, Separate Account VA-P, Allmerica Select Separate
Account II, Group VEL Account, Separate Account KG, Separate
Account KGC, Fulcrum Separate Account, and Allmerica Select
Separate Account of First Allmerica Financial Life Insurance
Company.
- Allmerica Investment Trust
(b) The Principal Business Address of each of the following Directors
and Officers of Allmerica Investments, Inc. is:
440 Lincoln Street
Worcester, Massachusetts 01653
<PAGE>
<TABLE>
<CAPTION>
NAME POSITION OR OFFICE WITH UNDERWRITER
<S> <C>
---- -----------------------------------
Abigail M. Armstrong Secretary and Counsel
Emil J. Aberizk, Jr. Vice President
Edward T. Berger Vice President and Chief Compliance Officer
Richard F. Betzler, Jr. Vice President
Philip L. Heffernan Vice President
John F. Kelly Director
Daniel Mastrototaro Vice President
William F. Monroe, Jr. Vice President
David J. Mueller Vice President and Controller
John F. O'Brien Director
Stephen Parker President, Director and Chief Executive Officer
Edward J. Parry, III Treasurer
Richard M. Reilly Director
Eric A. Simonsen Director
Mark G. Steinberg Senior Vice President
</TABLE>
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
Each account, book or other document required to be maintained by Section
31(a) of the 1940 Act and Rules 31a-1 to 31a-3 thereunder are maintained
by the Company at 440 Lincoln Street, Worcester, Massachusetts.
ITEM 31. MANAGEMENT SERVICES
The Company provides daily unit value calculations and related services
for the Company's separate accounts.
ITEM 32. UNDERTAKINGS
(a) Subject to the terms and conditions of Section 15(d) of the Securities
Exchange Act of 1934, the undersigned registrant hereby undertakes to
file with the Securities and Exchange Commission ("SEC") such
supplementary and periodic information, documents, and reports as may
be prescribed by any rule or regulation of the SEC heretofore or
hereafter duly adopted pursuant to authority conferred in that
section.
(b) The registrant hereby undertakes to include in the prospectus a
postcard that the applicant can remove to send for a Statement of
Additional Information.
(c) The registrant hereby undertakes to deliver a Statement of Additional
Information promptly upon written or oral request, according to the
requirements of Form N-4.
<PAGE>
(d) Insofar as indemnification for liability arising under the 1933 Act
may be permitted to Directors, Officers and Controlling Persons of
Registrant under any registration statement, underwriting agreement or
otherwise, Registrant has been advised that, in the opinion of the
SEC, such indemnification is against public policy as expressed in the
1933 Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment
by Registrant of expenses incurred or paid by a Director, Officer or
Controlling Person of 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,
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 1933 Act and will be
governed by the final adjudication of such issue.
(e) The Company hereby represents that the aggregate fees and charges
under the Contracts are reasonable in relation to the services
rendered, expenses expected to be incurred, and risks assumed by the
Company.
ITEM 33. REPRESENTATIONS CONCERNING WITHDRAWAL RESTRICTIONS ON SECTION 403(b)
PLANS AND UNDER THE TEXAS OPTIONAL RETIREMENT PROGRAM
Registrant, a separate account of Allmerica Financial Life Insurance and
Annuity Company ("Company"), states that it is (a) relying on Rule 6c-7
under the 1940 Act with respect to withdrawal restrictions under the Texas
Optional Retirement Program ("Program") and (b) relying on the "no-action"
letter (Ref. No. IP-6-88) issued on November 28, 1988 to the American
Council of Life Insurance, in applying the withdrawal restrictions of
Internal Revenue Code Section 403(b)(11). Registrant has taken the
following steps in reliance on the letter:
1. Appropriate disclosures regarding the redemption restrictions imposed
by the Program and by Section 403(b)(11) have been included in the
prospectus of each registration statement used in connection with the
offer of the Company's variable contracts.
2. Appropriate disclosures regarding the redemption restrictions imposed
by the Program and by Section 403(b)(11) have been included in sales
literature used in connection with the offer of the Company's variable
contracts.
3. Sales Representatives who solicit participants to purchase the
variable contracts have been instructed to specifically bring the
redemption restrictions imposed by the Program and by Section
403(b)(11) to the attention of potential participants.
4. A signed statement acknowledging the participant's understanding of
(i) the restrictions on redemption imposed by the Program and by
Section 403(b)(11) and (ii) the investment alternatives available
under the employer's arrangement will be obtained from each
participant who purchases a variable annuity contract prior to or at
the time of purchase.
Registrant hereby represents that it will not act to deny or limit a
transfer request except to the extent that a Service-Ruling or written
opinion of counsel, specifically addressing the fact pattern involved and
taking into account the terms of the applicable employer plan, determines
that denial or limitation is necessary for the variable annuity contracts
to meet the requirements of the Program or of Section 403(b). Any
transfer request not so denied or limited will be effected as
expeditiously as possible.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940 the Registrant certifies that it meets all of the
requirements for effectiveness of this Post-Effective Amendment to the
Registration Statement pursuant to Rule 485(b) under the Securities Act of
1933 and has duly caused this Post-Effective Amendment to the Registration
Statement to be signed on its behalf by the undersigned, thereto duly
authorized, in the City of Worcester, and Commonwealth of Massachusetts, on
the 2nd day of April, 1999.
ALLMERICA SELECT SEPARATE ACCOUNT OF
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
By: /s/ Abigail M. Armstrong
-------------------------------
Abigail M. Armstrong, Secretary
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment to the Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
Signatures Title Date
<S> <C> <C>
- ---------- ----- ----
/s/ Warren E. Barnes Vice President and Corporate Controller April 2, 1999
- ------------------------
Warren E. Barnes
/s/ Edward J. Parry III Director, Vice President, Chief Financial April 2, 1999
- ------------------------ Officer and Treasurer
Edward J. Parry III
/s/ Richard M. Reilly Director, President and April 2, 1999
- ------------------------ Chief Executive Officer
Richard M. Reilly
John F. O'Brien* Director and Chairman of the Board April 2, 1999
- ------------------------
Bruce C. Anderson* Director April 2, 1999
- ------------------------
Robert E. Bruce* Director and Chief Information Officer April 2, 1999
- ------------------------
John P. Kavanaugh* Director, Vice President and April 2, 1999
- ------------------------ Chief Investment Officer
John F. Kelly* Director, Vice President and April 2, 1999
- ------------------------ General Counsel
J. Barry May* Director April 2, 1999
- ------------------------
James R. McAuliffe* Director April 2, 1999
- ------------------------
Robert P. Restrepo, Jr.* Director April 2, 1999
- ------------------------
Eric A. Simonsen* Director and Vice President April 2, 1999
- ------------------------
Phillip E. Soule* Director April 2, 1999
- -----------------------
</TABLE>
*Sheila B. St. Hilaire, by signing her name hereto, does hereby sign this
document on behalf of each of the above-named Directors and Officers of the
Registrant pursuant to the Power of Attorney dated April 1, 1999 duly executed
by such persons.
/s/ Sheila B. St. Hilaire
- ---------------------------------------
Sheila B. St. Hilaire, Attorney-in-Fact
(333-63093)
<PAGE>
EXHIBIT TABLE
Exhibit 8(f) Directors' Power of Attorney
Exhibit 9 Opinion of Counsel
Exhibit 10 Consent of Independent Accountants
<PAGE>
POWER OF ATTORNEY
We, the undersigned, hereby severally constitute and appoint Richard M. Reilly,
John F. Kelly, Joseph W. MacDougall, Jr., and Sheila B. St. Hilaire, and each of
them singly, our true and lawful attorneys, with full power to them and each of
them, to sign for us, and in our names and in any and all capacities, any and
all amendments, including post-effective amendments, to the Registration
Statements on Form N-4 of Separate Account VA-K, Separate Account VA-P,
Allmerica Select Separate Account, Separate Account KG, Separate Account KGC and
Fulcrum Separate Account of Allmerica Financial Life Insurance and Annuity
Company, and to file the same with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys and each of them, acting alone, full power and authority to do
and perform each and every act and thing requisite or necessary to be done in
the premises, as fully to all intents and purposes as he or she might or could
do in person, hereby ratifying and confirming all that said attorneys or any of
them may lawfully do or cause to be done by virtue hereof. Witness our hands on
the date set forth below.
Signature Title Date
- --------- ----- ----
/s/ John F. O'Brien Director and Chairman of the Board 4/1/99
- ------------------------------ ------
John F. O'Brien
/s/ Bruce C. Anderson Director 4/1/99
- ------------------------------ ------
Bruce C. Anderson
/s/ Robert E. Bruce Director and Chief Information 4/1/99
- ------------------------------ Officer ------
Robert E. Bruce
/s/ John P. Kavanaugh Director, Vice President and 4/1/99
- ------------------------------ Chief Investment Officer ------
John P. Kavanaugh
/s/ John F. Kelly Director, Vice President and 4/1/99
- ------------------------------ General Counsel ------
John F. Kelly
/s/ J. Barry May Director 4/1/99
- ------------------------------ ------
J. Barry May
/s/ James R. McAuliffe Director 4/1/99
- ------------------------------ ------
James R. McAuliffe
/s/ Edward J. Parry, III Director, Vice President, Chief 4/1/99
- ------------------------------ Financial Officer and Treasurer ------
Edward J. Parry, III
/s/ Richard M. Reilly Director, President and 4/1/99
- ------------------------------ Chief Executive Officer ------
Richard M. Reilly
/s/ Robert P. Restrepo, Jr. Director 4/1/99
- ------------------------------ ------
Robert P. Restrepo, Jr.
/s/ Eric A. Simonsen Director and Vice President 4/1/99
- ------------------------------ ------
Eric A. Simonsen
/s/ Phillip E. Soule Director 4/1/99
- ------------------------------ ------
Phillip E. Soule
<PAGE>
April 1, 1999
Allmerica Financial Life Insurance and Annuity Company
440 Lincoln Street
Worcester MA 01653
RE: ALLMERICA SELECT SEPARATE ACCOUNT OF ALLMERICA FINANCIAL LIFE INSURANCE
AND ANNUITY COMPANY
FILE #NO.'S: 333-63093 AND 811-6632
Gentlemen:
In my capacity as Assistant Vice President and Counsel of Allmerica Financial
Life Insurance and Annuity Company (the "Company"), I have participated in
the preparation of this Post-Effective Amendment to the Registration
Statement for Separate Account KG on Form N-4 under the Securities Act of
1933 and amendment under the Investment Company Act of 1940, with respect to
the Company's qualified and non-qualified variable annuity contracts.
I am of the following opinion:
1. Allmerica Select Separate Account is a separate account of the Company
validly existing pursuant to the Delaware Insurance Code and the
regulations issued thereunder.
2. The assets held in Allmerica Select Separate Account are not chargeable
with liabilities arising out of any other business the Company may conduct.
3. The variable annuity contracts, when issued in accordance with the
Prospectus contained in the Post-Effective Amendment to the Registration
Statement and upon compliance with applicable local law, will be legal and
binding obligations of the Company in accordance with their terms and when
sold will be legally issued, fully paid and non-assessable.
In arriving at the foregoing opinion, I have made such examination of law and
examined such records and other documents as in my judgment are necessary or
appropriate.
I hereby consent to the filing of this opinion as an exhibit to the
Post-Effective Amendment to the Registration Statement for Allmerica Select
Separate Account on Form N-4 filed under the Securities Act of 1933.
Very truly yours,
/s/ Sheila B. St. Hilaire
Sheila B. St. Hilaire
Assistant Vice President and Counsel
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 2 to the Registration
Statement of Allmerica Select Separate Account of Allmerica Financial Life
Insurance and Annuity Company on Form N-4 of our report dated February 2,
1999, except for paragraph 2 of Note 12, which is as of March 19, 1999,
relating to the financial statements of Allmerica Financial Life Insurance
and Annuity Company, and our report dated March 26, 1999 relating to the
financial statements of Allmerica Select Separate Account of Allmerica
Financial Life Insurance and Annuity Company, both of which appear in such
Statement of Additional Information. We also consent to the reference to us
under the heading "Experts" in such Statement of Additional Information.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 22, 1999
