<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
STATEMENT OF ADDITIONAL INFORMATION
OF
FLEXIBLE PAYMENT DEFERRED VARIABLE AND FIXED 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 RESOURCE I AND II PROSPECTUS OF
ALLMERICA SELECT SEPARATE ACCOUNT DATED MAY 1, 2000 ("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, 2000
AFLIAC Select Resource I & II
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
GENERAL INFORMATION AND HISTORY..........................................2
TAXATION OF THE CONTRACT, THE VARIABLE ACCOUNT
AND THE COMPANY.....................................................3
SERVICES.................................................................3
UNDERWRITERS.............................................................3
ANNUITY BENEFIT PAYMENTS.................................................4
EXCHANGE OFFER...........................................................6
ENHANCED AUTOMATIC TRANSFER (DOLLAR COST AVERAGING) PROGRAM..............8
PERFORMANCE INFORMATION..................................................8
FINANCIAL STATEMENTS.....................................................F-1
</TABLE>
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 2, 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,
1999, the Company had over $17 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 a 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, 1999, First Allmerica and its subsidiaries (including the Company)
had over $25 billion in combined assets and over $43 billion in life insurance
in force.
Currently, 14 Sub-Accounts of the Variable Account are available under the
Allmerica Select Resource II contract and the Allmerica Select Resource I
contract, a predecessor contract no longer being sold (the "Contract".) Each
Sub-Account invests in a corresponding investment portfolio of Allmerica
Investment Trust (the "Trust"), Fidelity 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
the 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 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, 1999 and
1998 and for each of the three years in the period ended December 31, 1999, and
the financial statements of the Allmerica Select Separate Account of the Company
as of December 31, 1999 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. ("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
3
<PAGE>
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 7.0% 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 Company intends to recoup the commission and
other sales expense through a combination of anticipated surrender, withdrawal
and/or annuitization charges, profits from the Company's general account,
including the investment earnings on amounts allocated to accumulate on a fixed
basis in excess of the interest credited on fixed accumulations by the Company,
and the profit, if any, from the mortality and expense risk charge.
The aggregate amounts of commissions paid to Allmerica Investments for sales of
all contracts funded by Allmerica Select Separate Account (including contracts
not described in the Prospectus) for the years 1997, 1998 and 1999 were
$25,862,219, $31,179,269 and $29,686,895.
No commissions were retained by Allmerica Investments for sales of all contracts
funded by Allmerica Select Separate Account (including contracts not described
in the Prospectus) for the years 1997, 1998 and 1999.
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:
<TABLE>
<S> <C>
(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
(5) Annual Charge (one-day equivalent of 1.40% per annum).........................................0.000039
(6) Net Investment Rate (4) - (5).................................................................0.000296
4
<PAGE>
(7) Net Investment Factor 1.000000 + (6)...........................................................1.000296
(8) Accumulation Unit Value -- Current Period (1) x (7)..........................................$1.135336
</TABLE>
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 "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
Accumulated 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 or surrender
charge, the first monthly payment would be $44.80 ($44,800 divided by $1,000)
multiplied by $6.57, or $294.34.
Next, assume that the Annuity Unit Value for the assumed interest 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 fixed period certain annuity options and
commutable variable 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 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.
5
<PAGE>
EXCHANGE OFFER
A. VARIABLE ANNUITY CONTRACT EXCHANGE OFFER
The Company will permit Owners of certain variable annuity contracts, described
below, to exchange their contracts at net asset value for the variable annuity
contract described in the Prospectus, which is issued on Form No. A3025-96 or a
state variation thereof ("new Contract"). The Company reserves the right to
suspend this exchange offer at any time.
This offer applies to the exchange of the Company's Elective Payment Variable
Annuity contracts issued on Forms A3012-79 and A3013-79 ("Elective Payment
Exchanged Contract," all such contracts having numbers with a "JQ" or "JN"
prefix), and Single Payment Variable Annuity contracts issued on Forms A3014-79
and A3015-79 ("Single Payment Exchanged Contract," all such contracts having
numbers with a "KQ" or "KN" prefix). These contracts are referred to
collectively as the "Exchanged Contract." To effect an exchange, the Company
should receive (1) a completed application for the new Contract, (2) the
contract being exchanged, and (3) a signed Letter of Awareness.
SURRENDER CHARGE COMPUTATION. No surrender charge otherwise applicable to the
Exchanged Contract will be assessed as a result of the exchange. Instead, the
surrender charge under the new Contract will be computed as if the payments that
had been made to the Exchanged Contract were made to the new Contract, as of the
date of issue of the Exchanged Contract. Any additional payments to the new
Contract after the exchange will be subject to the surrender charge computation
outlined in the new Contract and the Prospectus; i.e., the charge will be
computed based on the number of years that the additional payment (or portion of
that payment) that is being withdrawn has been credited to the new Contract.
SUMMARY OF DIFFERENCES BETWEEN THE EXCHANGED CONTRACT AND THE NEW CONTRACT. The
new Contract and the Exchanged Contract differ substantially as summarized
below. There may be additional differences important to a person considering an
exchange, and the Prospectuses for the new Contract and the Exchanged Contract
should be reviewed carefully before the exchange request is submitted to the
Company.
SURRENDER CHARGE. The surrender charge under the new Contract, as described in
the Prospectus, imposes higher charge percentages against the excess amount
redeemed than the Exchanged Contract and, in the case of a Single Payment
Exchanged Contract, applies the charge for a greater number of years. In
addition, if an Elective Payment Exchanged Contract was issued more than nine
years before the date of an exchange under this offer, additional payments to
the Exchanged Contract would not be subject to a surrender charge. New payments
to the new Contract may be subject to a charge if withdrawn prior to the
surrender charge period described in the Prospectus.
CONTRACT FEE. Under the new Contract, the Company deducts a $30 fee on each
Contract anniversary and at surrender if the Accumulated Value is less than
$50,000. This fee is waived if the new Contract is part of a 401(k) plan. No
Contract fees are charged on the Single Payment Exchanged Contract. A $9
semi-annual fee is charged on the Elective Payment Variable Exchanged Contract
if the Accumulated Value is $10,000 or less.
VARIABLE ACCOUNT ADMINISTRATIVE EXPENSE CHARGE. Under the new Contract, the
Company assesses each Sub-Account a daily administrative expense charge at an
annual rate of 0.15% of the average daily net assets of the Sub-Account. No
administrative expense charge based on a percentage of Sub-Account assets is
imposed under the Exchanged Contract.
TRANSFER CHARGE. No charge for transfers is imposed under the Exchanged
Contract. Currently, no transfer charge is imposed under the new Contract;
however, the Company reserves the right to assess a charge not to exceed $25 for
each transfer after the twelfth in any Contract year.
ANNUITY TABLES. The Exchanged Contract contains higher guaranteed annuity rates.
6
<PAGE>
INVESTMENTS. Accumulated Values and payments under the new Contract may be
allocated to significantly more investment options than are available under the
Exchanged Contract.
DEATH BENEFIT. The Exchanged Contract offers a death benefit that is guaranteed
to be the greater of a Contract's Accumulated Value or gross payments made (less
withdrawals). At the time an exchange is processed, the Accumulated Value of the
Exchanged Contract becomes the "payment" for the new Contract.
Therefore, prior purchase payments made under the Exchanged Contract (if higher
than the Exchanged Contract's Accumulated Value) no longer are a basis for
determining the death benefit under the new Contract. Consequently, whether the
initial minimum death benefit under the new Contract is greater than, equal to,
or less than, the death benefit of the Exchanged Contract depends on whether the
Accumulated Value transferred to the new Contract is greater than, equal to, or
less than, the gross payments under the Exchanged Contract. In addition, under
the Exchanged Contract, the amount of any prior withdrawals is subtracted from
the value of the death benefit. Under the new Contract, where there is a
reduction in the death benefit amount due to a prior withdrawal, the value of
the death benefit is reduced in the same proportion that the new Contract's
Accumulated Value was reduced on the date of the withdrawal.
B. FIXED ANNUITY EXCHANGE OFFER
This exchange offer also applies to all fixed annuity contracts issued by the
Company's subsidiary, AFLIAC. A fixed annuity contract to which this exchange
offer applies may be exchanged at net asset value for the Contract described in
this Prospectus, subject to the same provisions for effecting the exchange and
for applying the new Contract's surrender charge as described above for variable
annuity contracts. This Prospectus should be read carefully before making such
exchange. Unlike a fixed annuity, the new Contract's value is not guaranteed and
will vary depending on the investment performance of the Underlying Funds to
which it is allocated. The new Contract has a different charge structure than a
fixed annuity contract, which includes not only a surrender charge that may vary
from that of the class of contracts to which the exchanged fixed contract
belongs, but also Contract fees, mortality and expense risk charges (for the
Company's assumption of certain mortality and expense risks), administrative
expense charges, transfer charges (for transfers permitted among Sub-Accounts
and the Fixed Account), and expenses incurred by the Underlying Funds.
Additionally, the interest rates offered under the Fixed Account of the new
Contract and the Annuity Tables for determining minimum annuity benefit payments
may be different from those offered under the exchanged fixed contract.
C. EXERCISE OF "FREE-LOOK PROVISION" AFTER ANY EXCHANGE
Persons who, under the terms of this exchange offer, exchange their contract for
the new Contract and subsequently cancel the new Contract within the time
permitted, as described in the sections of this Prospectus captioned "Right to
Cancel Individual Retirement Annuity" and "Right to Cancel All Other Contracts,"
will have their exchanged contract automatically reinstated as of the date of
cancellation. The refunded amount will be applied as the new current Accumulated
Value under the reinstated contract, which may be more or less than it would
have been had no exchange and reinstatement occurred. The refunded amount will
be allocated initially among the Fixed Account and Sub-Accounts of the
reinstated contract in the same proportion that the value in the Fixed Account
and the value in each Sub-Account bore to the transferred Accumulated Value on
the date of the exchange of the contract for the new Contract. For purposes of
calculating any surrender charge under the reinstated contract, the reinstated
contract will be deemed to have been issued and to have received past purchase
payments as if there had been no exchange.
7
<PAGE>
ENHANCED AUTOMATIC TRANSFER (DOLLAR COST AVERAGING) PROGRAM
To the extent permitted by law, the Company reserves the right to offer an
Enhanced Automatic Transfer (Dollar Cost Averaging) Program from time to time.
If an Owner elects automatic transfers while the enhanced program is in effect,
the Company will credit an enhanced interest rate to eligible payments made to
the Enhanced Automatic Transfer Program. Eligible payments:
- must be new payments to the Contract, including the initial payment,
- must be allocated to the Fixed Account, which will be the source
account,
- must be automatically transferred out of the Fixed Account to one or
more Sub-Accounts over a specified time period and
- will receive the enhanced rate while they remain in the Fixed Account.
Any new eligible payments made to an existing Enhanced Automatic Transfer
program will start a new Enhanced Automatic Transfer program. In this case, the
following rules apply:
- The money remaining in the Fixed Account from the original program
will be combined with the new eligible payment to determine the new
monthly transfer amount.
- The new monthly transfer amount will be transferred out of the Fixed
Account in accordance with the allocation instructions specified for
the new payment. If no allocation instructions are specified with the
new eligible payment, the allocation instructions for the original
eligible payment will be used. The new monthly transfer amount will be
transferred out of the Fixed Account on a LIFO (last-in, first-out
basis) to the selected Sub-Accounts on the date designated for the new
eligible payment.
- A new enhanced interest rate may be applied to the new eligible
payment, while the money remaining in the Fixed Account from the
original program will continue to receive the enhanced rate in effect
at the time the older payment was received.
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/or 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.
8
<PAGE>
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 and any applicable surrender charge which
would be assessed upon complete withdrawal of the investment.
Total Return figures are calculated by standardized methods prescribed by rules
of the Securities and Exchange Commission ("SEC"). The quotations are computed
by finding the average annual compounded rates of return over the specified
periods 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. The deduction of the surrender charge, if any, applicable at the end of
the period is included in the calculation, according to the following schedule:
<TABLE>
<CAPTION>
YEARS FROM DATE OF PAYMENT TO DATE CHARGE AS PERCENTAGE OF NEW
OF WITHDRAWAL PURCHASE PAYMENTS WITHDRAWN
---------------------------------- ---------------------------
<S> <C>
0 - 1 6.5%
2 6.0%
3 5.0%
4 4.0%
5 3.0%
6 2.0%
7 1.0%
More than 7 0.0%
</TABLE>
* Subject to the maximum limit described in the Prospectus.
No surrender charge is deducted upon expiration of the periods specified above.
In each calendar year, a certain amount (withdrawal without surrender charge
amount, as described in the Prospectus) is not subject to the surrender charge.
The calculations of Total Return include the deduction of the $30 annual
Contract fee.
SUPPLEMENTAL TOTAL RETURN INFORMATION
The Supplemental Total Return Information in this section 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 charges. It is
assumed, however, that the investment is NOT withdrawn at the end of each
period.
9
<PAGE>
The quotations of Supplemental Total Return are computed by finding the average
annual compounded rates of return over the specified periods that would equate
the initial amount invested to the ending values, according to the following
formula:
(n)
P(1 + T) = EV
Where: P = a hypothetical initial payment to the Variable
Account of $1,000
T = average annual total return
n = number of years
EV = the ending value of the $1,000 payment at the end of
the specified period
The calculation of Supplemental Total Return reflects the 1.40% annual charge
against the assets of the Sub-Accounts. The ending value assumes that the
Contract is NOT surrendered at the end of the specified period, and therefore
there is no adjustment for the surrender charge that would be applicable if the
Contract was surrendered at the end of the period. The calculation of
supplemental total return does not include the deduction of the $30 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, 1999:
<TABLE>
<S> <C>
Yield 4.66%
Effective Yield 4.77%
</TABLE>
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 $30 annual Contract
fee.
FINANCIAL STATEMENTS
Financial Statements are included for Allmerica Financial Life Insurance and
Annuity Company and for its Allmerica Select Separate Account.
10
<PAGE>
ALLMERICA FINANCIAL
LIFE INSURANCE AND
ANNUITY COMPANY
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
<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, 1999 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
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
auditing standards generally accepted in the United States 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 LLP
Boston, Massachusetts
February 1, 2000
<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) 1999 1998 1997
------------- ---- ---- ----
<S> <C> <C> <C>
REVENUES
Premiums................................... $ 0.5 $ 0.5 $ 22.8
Universal life and investment product
policy fees.............................. 328.1 267.4 212.2
Net investment income...................... 150.2 151.3 164.2
Net realized investment (losses) gains..... (8.7) 20.0 2.9
Other income............................... 36.9 0.6 1.4
------ ------ ------
Total revenues......................... 507.0 439.8 403.5
------ ------ ------
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims and losses......... 173.6 153.9 187.8
Policy acquisition expenses................ 49.8 64.6 2.8
Sales practice litigation.................. -- 21.0 --
Loss from cession of disability income
business................................. -- -- 53.9
Other operating expenses................... 151.3 104.1 101.3
------ ------ ------
Total benefits, losses and expenses.... 374.7 343.6 345.8
------ ------ ------
Income before federal income taxes............. 132.3 96.2 57.7
------ ------ ------
FEDERAL INCOME TAX EXPENSE
Current.................................... 15.5 22.1 13.9
Deferred................................... 30.5 11.8 7.1
------ ------ ------
Total federal income tax expense....... 46.0 33.9 21.0
------ ------ ------
Net income..................................... $ 86.3 $ 62.3 $ 36.7
====== ====== ======
</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, EXCEPT PER SHARE DATA) 1999 1998
------------------------------------ --------- ---------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities at fair value (amortized cost of
$1,354.2 and $1,284.6)............................ $ 1,324.6 $ 1,330.4
Equity securities at fair value (cost of $25.2 and
$27.4)............................................ 32.6 31.8
Mortgage loans...................................... 223.7 230.0
Policy loans........................................ 166.8 151.5
Real estate and other long-term investments......... 25.1 23.6
--------- ---------
Total investments............................... 1,772.8 1,767.3
--------- ---------
Cash and cash equivalents............................. 132.9 217.9
Accrued investment income............................. 36.0 33.5
Deferred policy acquisition costs..................... 1,156.4 950.5
Reinsurance receivable on paid and unpaid losses,
benefits and unearned premiums...................... 287.2 308.0
Other assets.......................................... 64.8 46.9
Separate account assets............................... 14,527.9 11,020.4
--------- ---------
Total assets.................................... $17,978.0 $14,344.5
========= =========
LIABILITIES
Policy liabilities and accruals:
Future policy benefits.............................. $ 2,274.7 $ 2,284.8
Outstanding claims and losses....................... 13.7 17.9
Unearned premiums................................... 2.6 2.7
Contractholder deposit funds and other policy
liabilities....................................... 44.3 38.1
--------- ---------
Total policy liabilities and accruals........... 2,335.3 2,343.5
--------- ---------
Expenses and taxes payable............................ 216.8 146.2
Reinsurance premiums payable.......................... 17.9 45.7
Deferred federal income taxes......................... 94.8 78.8
Separate account liabilities.......................... 14,527.9 11,020.4
--------- ---------
Total liabilities............................... 17,192.7 13,634.6
--------- ---------
Contingencies (Note 12)
SHAREHOLDER'S EQUITY
Common stock, $1,000 par value, 10,000 shares
authorized, 2,526 and 2,524 shares, issued and
outstanding......................................... 2.5 2.5
Additional paid-in capital............................ 423.7 407.9
Accumulated other comprehensive (loss) income......... (2.6) 24.1
Retained earnings..................................... 361.7 275.4
--------- ---------
Total shareholder's equity...................... 785.3 709.9
--------- ---------
Total liabilities and shareholder's equity...... $17,978.0 $14,344.5
========= =========
</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) 1999 1998 1997
------------- ------- ------- -------
<S> <C> <C> <C>
COMMON STOCK................................... $ 2.5 $ 2.5 $ 2.5
------ ------ ------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of period............. 407.9 386.9 346.3
Issuance of common stock................... 15.8 21.0 40.6
------ ------ ------
Balance at end of period................... 423.7 407.9 386.9
------ ------ ------
ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
Net unrealized (depreciation) appreciation
on investments:
Balance at beginning of period............. 24.1 38.5 20.5
(Depreciation) appreciation during the
period:
Net (depreciation) appreciation on
available-for-sale securities........ (41.1) (23.4) 27.0
Benefit (provision) for deferred
federal income taxes................. 14.4 9.0 (9.0)
------ ------ ------
(26.7) (14.4) 18.0
------ ------ ------
Balance at end of period................... (2.6) 24.1 38.5
------ ------ ------
RETAINED EARNINGS
Balance at beginning of period............. 275.4 213.1 176.4
Net income................................. 86.3 62.3 36.7
------ ------ ------
Balance at end of period................... 361.7 275.4 213.1
------ ------ ------
Total shareholder's equity............. $785.3 $709.9 $641.0
====== ====== ======
</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) 1999 1998 1997
------------- ------ ------ ------
<S> <C> <C> <C>
Net income.................................. $ 86.3 $ 62.3 $36.7
Other comprehensive (loss) income:
Net (depreciation) appreciation on
available-for-sale securities......... (41.1) (23.4) 27.0
Benefit (provision) for deferred federal
income taxes.......................... 14.4 9.0 (9.0)
------ ------ -----
Other comprehensive (loss) income... (26.7) (14.4) 18.0
------ ------ -----
Comprehensive income.................... $ 59.6 $ 47.9 $54.7
====== ====== =====
</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) 1999 1998 1997
------------- ------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................. $ 86.3 $ 62.3 $ 36.7
Adjustments to reconcile net income to
net cash used in operating activities:
Net realized losses/(gains)......... 8.7 (20.0) (2.9)
Net amortization and depreciation... (2.3) (7.1) --
Sales practice litigation expense... -- 21.0 --
Loss from cession of disability
income business................... -- -- 53.9
Deferred federal income taxes....... 30.5 11.8 7.1
Payment related to cession of
disability income business........ -- -- (207.0)
Change in deferred acquisition
costs............................. (169.7) (177.8) (181.3)
Change in reinsurance premiums
payable........................... (31.5) 40.8 3.9
Change in accrued investment
income............................ (2.5) 0.7 3.5
Change in policy liabilities and
accruals, net..................... (8.4) 193.1 (72.4)
Change in reinsurance receivable.... 20.7 (56.9) 22.1
Change in expenses and taxes
payable........................... 64.1 55.4 0.2
Other, net.......................... (14.8) (28.5) (7.1)
------- ------- -------
Net cash (used in) provided by
operating activities.......... (18.9) 94.8 (343.3)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals and maturities
of available-for-sale fixed
maturities............................ 330.9 187.0 909.7
Proceeds from disposals of equity
securities............................ 30.9 53.3 2.4
Proceeds from disposals of other
investments........................... 0.8 22.7 23.7
Proceeds from mortgages matured or
collected............................. 30.5 60.1 62.9
Purchase of available-for-sale fixed
maturities............................ (415.5) (136.0) (579.7)
Purchase of equity securities........... (20.2) (30.6) (3.2)
Purchase of other investments........... (44.1) (22.7) (9.0)
Purchase of mortgages................... -- (58.9) (70.4)
Other investing activities, net......... 2.0 (3.9) --
------- ------- -------
Net cash (used in) provided by
investing activities.............. (84.7) 71.0 336.4
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Contribution from subsidiaries.......... 14.6 -- --
Proceeds from issuance of stock and
capital paid in....................... 4.0 21.0 19.2
------- ------- -------
Net cash provided by financing
activities........................ 18.6 21.0 19.2
------- ------- -------
Net change in cash and cash equivalents..... (85.0) 186.8 12.3
Cash and cash equivalents, beginning of
period..................................... 217.9 31.1 18.8
------- ------- -------
Cash and cash equivalents, end of period.... $ 132.9 $ 217.9 $ 31.1
======= ======= =======
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid........................... $ -- $ -- $ --
Income taxes paid....................... $ 4.4 $ 36.2 $ 5.4
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-5
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
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 First Allmerica Financial Life Insurance Company ("FAFLIC") which
is a wholly-owned subsidiary of Allmerica Financial Corporation ("AFC"). As
noted below, the consolidated accounts of AFLIAC include the accounts of certain
wholly-owned non-insurance subsidiaries (principally brokerage and investment
advisory subsidiaries).
Prior to July 1, 1999, AFLIAC was a wholly-owned subsidiary of SMA Financial
Corporation ("SMAFCO"), which was a wholly-owned subsidiary of FAFLIC. Effective
July 1, 1999 and in connection with AFC's restructuring activities, SMAFCO was
renamed Allmerica Asset Management , Inc. ("AAM") and contributed it's ownership
of AFLIAC to FAFLIC. AAM also contributed Allmerica Investments, Inc., Allmerica
Investment Management Company, Inc., Allmerica Financial Investment Management
Services, Inc., and Allmerica Financial Services Insurance Agency, Inc., to
AFLIAC in exchange for one share of AFLIAC common stock. The equity of these
four companies on July 1, 1999 was $11.8 million. For the six months ended
December 31, 1999, the subsidiaries of AFLIAC had total revenue of $35.5 million
and total benefits, losses and expenses of $24.4 million. All significant
intercompany accounts and transactions have been eliminated.
In addition, effective November 1, 1999, the Company's consolidated financial
statements include five wholly-owned insurance agencies. These agencies are
Allmerica Investments Insurance Agency Inc. of Alabama, Allmerica Investments
Insurance Agency of Florida Inc., Allmerica Investment Insurance Agency Inc. of
Georgia, Allmerica Investment Insurance Agency Inc. of Kentucky, and Allmerica
Investments Insurance Agency Inc. of Mississippi.
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 eleven 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.
F-6
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Debt securities and marketable equity 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 a plan to dispose of all real estate assets. As
of December 31, 1999, there was one property remaining in the Company's real
estate portfolio, which is being actively marketed. This asset is carried at the
estimated fair value less costs of disposal. Depreciation is not recorded on
this asset while it is held for disposal.
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
F-7
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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 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
3.0% to 6.0% 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, variable
universal life and variable annuities 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.
Liabilities for variable annuities include a reserve for benefit claims in
excess of a guaranteed minimum fund value.
Individual disability income benefit liabilities for active lives are estimated
using the net level premium method, and assumptions as to future morbidity 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 and losses 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.
F-8
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 insurance and individual and group 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 include annuity benefit claims in excess of a guaranteed
minimum fund value, and 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 (including certain non-insurance operations)
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 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. OTHER INCOME AND OTHER OPERATING EXPENSES
Other income and other operating expenses for the year ended December 31, 1999
include investment management and brokerage income and sub-advisory expenses
arising from the activities of the non-insurance subsidiaries that were
transferred to AFLIAC during 1999, as more fully described in Note 1A.
F-9
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
K. 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
investments in foreign operations. This statement is effective for fiscal
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY (an indirect wholly-owned
subsidiary of Allmerica Financial Corporation) years beginning after June 15,
2000. 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 of 1998, 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 adoption of this statement had no effect on the results
of operations or financial position of the Company.
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 beginning after December 15, 1997. AFLIAC consists
of one segment, Allmerica Financial Services, which underwrites and distributes
variable annuities and variable universal life insurance via retail channels.
In June 1997, the FASB also issued Statement No. 130, "Reporting Comprehensive
Income" ("Statement No. 130"). Statement No. 130 establishes 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
F-10
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
L. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year
presentation.
2. SIGNIFICANT TRANSACTIONS
During 1999, AFLIAC's parent contributed $11.8 million of additional paid-in
capital to the Company in the form of four subsidiaries as disclosed in Note 1A
above. These subsidiaries consisted of assets of $22.0 million, of which $14.6
million was cash and cash equivalents, and liabilities of $10.2 million. During
1999, 1998 and 1997, SMAFCO contributed $4.0 million, $21.0 million, and $40.6
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.
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 did 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.
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>
1999
-------------------------------------------
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....... $ 5.2 $ 0.2 $-- $ 5.4
States and political subdivisions....... 12.4 0.1 -- 12.5
Foreign governments..................... 38.6 0.9 0.6 38.9
Corporate fixed maturities.............. 1,180.0 10.3 38.9 1,151.4
Mortgage-backed securities.............. 118.0 1.1 2.7 116.4
-------- ----- ----- --------
Total fixed maturities.................. $1,354.2 $12.6 $42.2 $1,324.6
======== ===== ===== ========
Equity securities....................... $ 25.2 $ 7.4 $-- $ 32.6
======== ===== ===== ========
</TABLE>
(1) Amortized cost for fixed maturities and cost for equity securities.
F-11
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<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>
(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, 1999, the amortized
cost and market value of these assets on deposit in New York were
$196.4 million and $193.0 million, respectively. At December 31, 1998, the
amortized cost and market value of assets on deposit were $268.5 million and
$284.1 million, respectively. In addition, fixed maturities, excluding those
securities on deposit in New York, with an amortized cost of $4.1 million and
$4.2 million were on deposit with various state and governmental authorities at
December 31, 1999 and 1998, respectively.
There were no contractual fixed maturity investment commitments at December 31,
1999.
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>
1999
-------------------
DECEMBER 31, AMORTIZED FAIR
(IN MILLIONS) COST VALUE
- ------------- --------- --------
<S> <C> <C>
Due in one year or less..................................... $ 54.5 $ 54.8
Due after one year through five years....................... 349.1 347.2
Due after five years through ten years...................... 652.9 637.1
Due after ten years......................................... 297.7 285.5
-------- --------
Total....................................................... $1,354.2 $1,324.6
======== ========
</TABLE>
F-12
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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>
1999
Net appreciation, beginning of year......................... $ 16.2 $ 7.9 $ 24.1
------ ------ ------
Net depreciation on available-for-sale securities........... (75.3) (0.2) (75.5)
Net appreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ 34.4 -- 34.4
Benefit from deferred federal income taxes.................. 14.3 0.1 14.4
------ ------ ------
(26.6) (0.1) (26.7)
------ ------ ------
Net (depreciation) appreciation, end of year................ $(10.4) $ 7.8 $ (2.6)
====== ====== ======
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
====== ====== ======
</TABLE>
(1) Includes net (depreciation) appreciation on other investments of $(3.1)
million, $0.9 million, and $1.3 million in 1999, 1998, and 1997,
respectively.
B. MORTGAGE LOANS AND REAL ESTATE
AFLIAC's mortgage loans are diversified by property type and location. The real
estate investment was obtained by an affiliate 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 the real estate investment net of
applicable reserves were $234.6 million and $244.5 million at December 31, 1999
and 1998, respectively. Reserves for mortgage loans were $2.4 million and
$3.3 million at December 31, 1999 and 1998, respectively.
F-13
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During 1997, the Company committed to a plan to dispose of all real estate
assets. At December 31, 1999, there was one property remaining in the Company's
real estate portfolio which is being actively marketed. Depreciation is not
recorded on this asset while it is held for disposal.
There were no non-cash investing activities, including real estate acquired
through foreclosure of mortgage loans, in 1999, 1998 and 1997.
There were no material contractual commitments to extend credit under commercial
mortgage loan agreements at December 31, 1999.
Mortgage loans and real estate investments comprised the following property
types and geographic regions:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1999 1998
- ------------- ------ ------
<S> <C> <C>
Property type:
Office building........................................... $136.1 $129.2
Residential............................................... 18.5 18.9
Retail.................................................... 28.3 37.4
Industrial/warehouse...................................... 51.1 59.2
Other..................................................... 3.0 3.1
Valuation allowances...................................... (2.4) (3.3)
------ ------
Total....................................................... $234.6 $244.5
====== ======
Geographic region:
South Atlantic............................................ $ 60.7 $ 55.5
Pacific................................................... 76.2 80.0
East North Central........................................ 35.9 41.4
Middle Atlantic........................................... 20.1 22.5
New England............................................... 29.9 26.9
West South Central........................................ 1.9 6.7
Other..................................................... 12.3 14.8
Valuation allowances...................................... (2.4) (3.3)
------ ------
Total....................................................... $234.6 $244.5
====== ======
</TABLE>
At December 31, 1999, scheduled mortgage loan maturities were as follows:
2000 -- $40.8 million; 2001 -- $6.3 million; 2002 -- $11.2 million; 2003 --
$0.5 million; 2004 -- $23.7 million; and $141.2 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 1999, the Company did not refinance any mortgage loans
based on terms which differed from those granted to new borrowers.
F-14
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
C. INVESTMENT VALUATION ALLOWANCES
Investment valuation allowances which have been deducted in arriving at
investment carrying values as presented in the consolidated balance sheets 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>
1999
Mortgage loans.............................................. $ 3.3 $(0.8) $0.1 $2.4
===== ===== ==== ====
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
===== ===== ==== ====
</TABLE>
Provisions on mortgages during 1999 and 1998 reflect the release of redundant
specific 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 costs to sell pursuant to the aforementioned 1997 plan
of disposal.
The carrying value of impaired loans was $11.4 million and $15.3 million, with
related reserves of $0.7 million and $1.5 million as of December 31, 1999 and
1998, respectively. All impaired loans were reserved for as of December 31, 1999
and 1998.
The average carrying value of impaired loans was $14.3 million, $17.0 million
and $19.8 million, with related interest income while such loans were impaired
of $1.5 million, $2.0 million and $2.2 million as of December 31, 1999, 1998 and
1997, respectively.
D. OTHER
At December 31, 1999 and 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) 1999 1998 1997
- ------------- ------ ------ ------
<S> <C> <C> <C>
Fixed maturities............................................ $107.2 $107.7 $130.0
Mortgage loans.............................................. 19.0 25.5 20.4
Equity securities........................................... 0.4 0.3 1.3
Policy loans................................................ 12.4 11.7 10.8
Real estate and other long-term investments................. 4.0 4.8 4.9
Short-term investments...................................... 9.5 4.2 1.4
------ ------ ------
Gross investment income................................. 152.5 154.2 168.8
Less investment expenses.................................... (2.3) (2.9) (4.6)
------ ------ ------
Net investment income................................... $150.2 $151.3 $164.2
====== ====== ======
</TABLE>
F-15
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At December 31, 1999, the Company had fixed maturities with a carrying value of
$0.8 million on non-accrual status. There were no mortgage loans on non-accrual
status at December 31, 1999. 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 investments, was a reduction in net income of $1.2 million in 1999,
and had no impact in 1998 and 1997.
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 $12.2 million, $12.6 million and $21.1 million at December 31,
1999, 1998 and 1997, respectively. Interest income on restructured mortgage
loans that would have been recorded in accordance with the original terms of
such loans amounted to $0.9 million, $1.4 million and $1.9 million in 1999,
1998, and 1997, respectively. Actual interest income on these loans included in
net investment income aggregated $1.1 million, $1.8 million and $2.1 million in
1999, 1998 and 1997, respectively.
There were no fixed maturities or mortgage loans which were non-income producing
for the year ended December 31, 1999.
Included in other long-term investments is income from limited partnerships of
$0.9 million and $0.7 million in 1999 and 1998, respectively. There was no
income from limited partnerships included in other long-term investments in
1997.
B. NET REALIZED INVESTMENT GAINS AND LOSSES
Realized (losses) gains on investments were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- ------ ----- -----
<S> <C> <C> <C>
Fixed maturities............................................ $(18.8) $(6.1) $ 3.0
Mortgage loans.............................................. 0.8 8.0 (1.1)
Equity securities........................................... 8.5 15.7 0.5
Real estate and other....................................... 0.8 2.4 0.5
------ ----- -----
Net realized investment (losses) gains...................... $ (8.7) $20.0 $ 2.9
====== ===== =====
</TABLE>
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>
PROCEEDS FROM
FOR THE YEARS ENDED DECEMBER 31, VOLUNTARY GROSS GROSS
(IN MILLIONS) SALES GAINS LOSSES
- ------------- ------------- ----- ------
<S> <C> <C> <C>
1999
Fixed maturities............................................ $162.3 $ 2.7 $4.3
Equity securities........................................... $ 30.4 $10.1 $1.6
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 $--
</TABLE>
F-16
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
C. OTHER COMPREHENSIVE INCOME RECONCILIATION
The following table provides a reconciliation of gross unrealized (losses) gains
to the net balance shown in the consolidated statements of comprehensive income:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- ------ ------ -----
<S> <C> <C> <C>
Unrealized (losses) gains on securities:
Unrealized holding (losses) gains arising during period (net
of taxes of $(18.0) million, $(5.6) million and
$10.2 million in 1999, 1998 and 1997, respectively)........ $(33.4) $ (8.2) $20.3
Less: reclassification adjustment for (losses) gains
included in net income (net of taxes of $(3.6) million,
$3.4 million and $1.2 million in 1999, 1998 and 1997,
respectively).............................................. (6.7) 6.2 2.3
------ ------ -----
Other comprehensive (loss) income........................... $(26.7) $(14.4) $18.0
====== ====== =====
</TABLE>
5. FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS
Statement No. 107, "Disclosures about Fair Value of Financial Instruments,"
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.
F-17
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 are
limited to the lesser of the present value of the cash flows or book value.
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.
FIXED ANNUITY AND OTHER CONTRACTS (WITHOUT MORTALITY FEATURES)
Fair values for the Company's liabilities under individual fixed annuity
contracts are estimated based on current surrender values, supplemental
contracts without life contingencies reflect current fund balances, and other
individual contract funds represent the present value of future policy benefits.
The estimated fair values of the financial instruments were as follows:
<TABLE>
<CAPTION>
1999 1998
------------------ ------------------
DECEMBER 31, CARRYING FAIR CARRYING FAIR
(IN MILLIONS) VALUE VALUE VALUE VALUE
- ------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents................................. $ 132.9 $ 132.9 $ 217.9 $ 217.9
Fixed maturities.......................................... 1,324.6 1,324.6 1,330.4 1,330.4
Equity securities......................................... 32.6 32.6 31.8 31.8
Mortgage loans............................................ 223.7 222.8 230.0 241.9
Policy loans.............................................. 166.8 166.8 151.5 151.5
-------- -------- -------- --------
$1,880.6 $1,879.7 $1,961.6 $1,973.5
======== ======== ======== ========
FINANCIAL LIABILITIES
Individual fixed annuity contracts........................ $1,048.0 $1,014.9 $1,069.4 $1,034.6
Supplemental contracts without life contingencies......... 25.0 25.0 21.0 21.0
Other individual contract deposit funds................... 19.3 19.3 17.0 17.0
-------- -------- -------- --------
$1,092.3 $1,059.2 $1,107.4 $1,072.6
======== ======== ======== ========
</TABLE>
F-18
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 in
the consolidated statement of income is shown below:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- ----- ----- -----
<S> <C> <C> <C>
Federal income tax expense
Current................................................... $15.5 $22.1 $13.9
Deferred.................................................. 30.5 11.8 7.1
----- ----- -----
Total....................................................... $46.0 $33.9 $21.0
===== ===== =====
</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.
The deferred income tax (asset) liability represents the tax effects of
temporary differences:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1999 1998
- ------------- ------- -------
<S> <C> <C>
Deferred tax (assets) liabilities
Policy reserves........................................... $(233.7) $(205.1)
Deferred acquisition costs................................ 339.7 278.8
Investments, net.......................................... (4.0) 12.5
Litigation reserves....................................... (4.3) (7.4)
Bad debt reserve.......................................... -- (0.4)
Other, net................................................ (2.9) 0.4
------- -------
Deferred tax liability, net................................. $ 94.8 $ 78.8
======= =======
</TABLE>
Gross deferred income tax liabilities totaled $360.4 million and $291.7 million
at December 31, 1999 and 1998, respectively. Gross deferred income tax assets
totaled $265.6 million and $212.9 million at December 31, 1999 and 1998,
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 Internal
Revenue Service ("IRS"), and provisions are routinely made in the financial
statements in anticipation of the results of these audits. The IRS has examined
the FAFLIC/AFLIAC consolidated group's federal income tax returns through 1994.
The Company has appealed certain adjustments proposed by the IRS with respect
federal income tax returns for 1992, 1993, and 1994 for the FAFLIC/AFLIAC
consolidated group. 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
F-19
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 $173.9 million, $145.4 million and $124.1 million in
1999, 1998 and 1997 respectively. The net amounts payable to FAFLIC and
affiliates for accrued expenses and various other liabilities and receivables
were $48.6 million and $16.4 million at December 31, 1999 and 1998,
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 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 1999, 1998 or 1997. During
2000, AFLIAC could pay dividends of $34.3 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
F-20
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, 1999 and 1998 for the
disability income business were $241.5 million and $230.8 million, respectively,
traditional life were $9.7 million and $11.4 million, respectively, and
universal and variable universal life were $36.0 million and $65.8 million,
respectively.
The effects of reinsurance were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- ------ ------ ------
<S> <C> <C> <C>
Insurance premiums:
Direct.................................................... $ 41.3 $ 45.5 $ 48.8
Assumed................................................... -- -- 2.6
Ceded..................................................... (40.8) (45.0) (28.6)
------ ------ ------
Net premiums................................................ $ 0.5 $ 0.5 $ 22.8
====== ====== ======
Insurance and other individual policy benefits, claims and
losses:
Direct.................................................... $210.6 $204.0 $226.0
Assumed................................................... -- -- 4.2
Ceded..................................................... (37.0) (50.1) (42.4)
------ ------ ------
Net policy benefits, claims and losses...................... $173.6 $153.9 $187.8
====== ====== ======
</TABLE>
10. DEFERRED POLICY ACQUISITION COSTS
The following reflects the changes to the deferred policy acquisition cost
asset:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- -------- ------ ------
<S> <C> <C> <C>
Balance at beginning of year................................ $ 950.5 $765.3 $632.7
Acquisition expenses deferred............................. 219.5 242.4 184.2
Amortized to expense during the year...................... (49.8) (64.6) (53.1)
Adjustment to equity during the year...................... 36.2 7.4 (10.2)
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...................................... $1,156.4 $950.5 $765.3
======== ====== ======
</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 and losses as new information becomes available
and further events occur which may impact the resolution of
F-21
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 and losses
related to the Company's disability income business was $240.7 million and
$233.3 million at December 31, 1999 and 1998. 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 used in determining the
liability 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 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. The court granted preliminary approval of the settlement
on December 4, 1998. On May 19, 1999, the Court issued an order certifying the
class for settlement purposes and granting final approval of the settlement
agreement. 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, 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, based on the advice of
legal counsel, the ultimate resolution of these proceedings will not have a
material effect on the Company's consolidated 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 resulted from computer programs being written using two
digits rather than four to define the applicable year. 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.
F-22
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Although the Company does not believe that there is a material contingency
associated with the Year 2000 issue, 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. In 1999, 49 out of 50 states have adopted the
National Association of Insurance Commissioners proposed Codification, which
provides for uniform statutory accounting principles. These principles are
effective January 1, 2001. The Company is currently assessing the impact that
the adoption of Codification will have on its statutory results of operations
and financial position. Statutory net income and surplus are as follows:
<TABLE>
<CAPTION>
(IN MILLIONS) 1999 1998 1997
- ------------- ------ ------ ------
<S> <C> <C> <C>
Statutory net income........................................ $ 5.0 $ (8.2) $ 31.5
Statutory shareholder's surplus............................. $342.7 $312.2 $309.7
</TABLE>
F-23
<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 of 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, 1999, 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 accounting principles generally accepted in the
United States. These financial statements are the responsibility of Allmerica
Financial Life Insurance and Annuity Company; 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 auditing standards
generally accepted in the United States, 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, 1999 by correspondence with the Funds, provide a reasonable basis for the
opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
April 3, 2000
<PAGE>
ALLMERICA SELECT SEPARATE ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1999
<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 .................... $307,191,165 $479,255,899 $376,756,029 $147,985,588
Investments in shares of Fidelity Variable Insurance Products Fund (VIP) -- -- -- --
Investment in shares of T. Rowe Price International Series, Inc. ....... -- -- -- --
Investment in shares of Alliance Capital Management Series
Receivable from Allmerica Financial Life Insurance and
Annuity Company (Sponsor) ............................................ -- -- -- --
------------ ------------ ------------- ------------
Total assets ...................................................... 307,191,165 479,255,899 376,756,029 147,985,588
LIABILITIES:
Payable to Allmerica Financial Life Insurance and
Annuity Company (Sponsor) ............................................ 15,697 46,813 128,479 11,317
------------ ------------ ------------- ------------
Net assets ......................................................... $307,175,468 $479,209,086 $376,627,550 $147,974,271
------------ ------------ ------------- ------------
------------ ------------ ------------- ------------
Net asset distribution by category:
Variable annuity contracts ........................................... $307,175,468 $479,209,086 $376,627,550 $147,974,271
------------ ------------ ------------- ------------
------------ ------------ ------------- ------------
Units outstanding, December 31, 1999 ................................... 85,192,294 134,059,012 140,727,270 110,437,461
Net asset value per unit, December 31, 1999 ............................ $ 3.605672 $ 3.574613 $ 2.676294 $ 1.339892
<CAPTION>
Select Select Select
Money International Capital Emerging
Market Equity Appreciation Markets
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica Investment Trust .................... $161,507,693 $228,765,678 $146,114,971 $ 18,406,508
Investments in shares of Fidelity Variable Insurance Products Fund (VIP) -- -- -- --
Investment in shares of T. Rowe Price International Series, Inc. ....... -- -- -- --
Investment in shares of Alliance Capital Management Series
Receivable from Allmerica Financial Life Insurance and
Annuity Company (Sponsor) ............................................ 101,580 -- -- --
------------ ------------- ------------ ------------
Total assets ...................................................... 161,609,273 228,765,678 146,114,971 18,406,508
LIABILITIES:
Payable to Allmerica Financial Life Insurance and
Annuity Company (Sponsor) ............................................ -- 20,984 15,887 16,407
------------ ------------- ------------ ------------
Net assets ......................................................... $161,609,273 $228,744,694 $146,099,084 $ 18,390,101
------------ ------------- ------------ ------------
------------ ------------- ------------ ------------
Net asset distribution by category:
Variable annuity contracts ........................................... $161,609,273 $228,744,694 $146,099,084 $ 18,390,101
------------ ------------- ------------ ------------
------------ ------------- ------------ ------------
Units outstanding, December 31, 1999 ................................... 127,048,118 109,511,148 62,949,269 14,502,193
Net asset value per unit, December 31, 1999 ............................ $ 1.272032 $ 2.088780 $ 2.320902 $ 1.268091
</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, 1999
<TABLE>
<CAPTION>
Select Select Alliance
Value Strategic Premier
Opportunity Growth Growth
------------ ------------ --------------
<S> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica Investment Trust .................... $ 40,752,641 $ 19,538,593 $ --
Investments in shares of Fidelity Variable Insurance Products Fund (VIP) -- -- --
Investment in shares of T. Rowe Price International Series, Inc. ....... -- -- --
Investment in shares of Alliance Capital Management Series ............. 6,581,982
Receivable from Allmerica Financial Life Insurance and
Annuity Company (Sponsor) ............................................ -- -- --
------------ ------------ --------------
Total assets ...................................................... 40,752,641 19,538,593 6,581,982
LIABILITIES:
Payable to Allmerica Financial Life Insurance and
Annuity Company (Sponsor) ............................................ 21,088 5,317 15,796
------------ ------------ --------------
Net assets ......................................................... $ 40,731,553 $ 19,533,276 $ 6,566,186
------------ ------------ --------------
------------ ------------ --------------
Net asset distribution by category:
Variable annuity contracts ........................................... $ 40,731,553 $ 19,533,276 $ 6,566,186
------------ ------------ --------------
------------ ------------ --------------
Units outstanding, December 31, 1999 ................................... 43,839,370 17,712,212 5,309,373
Net asset value per unit, December 31, 1999 ............................ $ 0.929109 $ 1.102814 $ 1.236716
<CAPTION>
Fidelity VIP Fidelity VIP Fidelity VIP
High Income Equity-Income Growth
------------- ------------- -------------
<S> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica Investment Trust .................... $ -- $ -- $ --
Investments in shares of Fidelity Variable Insurance Products Fund (VIP) 125,837,554 223,253,201 285,601,304
Investment in shares of T. Rowe Price International Series, Inc. ....... -- -- --
Investment in shares of Alliance Capital Management Series .............
Receivable from Allmerica Financial Life Insurance and
Annuity Company (Sponsor) ............................................ -- -- --
Total assets ...................................................... 125,837,554 223,253,201 285,601,304
------------- ------------- -------------
LIABILITIES:
Payable to Allmerica Financial Life Insurance and
Annuity Company (Sponsor) ............................................ 26,136 40,403 15,929
------------- ------------- -------------
Net assets ......................................................... $125,811,418 $223,212,798 $285,585,375
------------- ------------- -------------
------------- ------------- -------------
Net asset distribution by category:
Variable annuity contracts ........................................... $125,811,418 $223,212,798 $285,585,375
------------- ------------- -------------
Units outstanding, December 31, 1999 ................................... 87,413,354 114,059,184 90,071,043
Net asset value per unit, December 31, 1999 ............................ $ 1.439270 $ 1.956991 $ 3.170668
<CAPTION>
T. Rowe Price
International
Stock
-------------
<S> <C>
Investments in shares of Allmerica Investment Trust .................... $ --
Investments in shares of Fidelity Variable Insurance Products Fund (VIP) --
Investment in shares of T. Rowe Price International Series, Inc. ....... 91,538,064
Investment in shares of Alliance Capital Management Series ............. --
Receivable from Allmerica Financial Life Insurance and
Annuity Company (Sponsor) ............................................ --
-------------
Total assets ...................................................... 91,538,064
LIABILITIES:
Payable to Allmerica Financial Life Insurance and
Annuity Company (Sponsor) ............................................ 13,201
-------------
Net assets ......................................................... $ 91,524,863
-------------
-------------
Net asset distribution by category:
Variable annuity contracts ........................................... $ 91,524,863
-------------
-------------
Units outstanding, December 31, 1999 ................................... 49,814,384
Net asset value per unit, December 31, 1999 ............................ $ 1.837318
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-2
<PAGE>
ALLMERICA SELECT SEPARATE ACCOUNT
STATEMENTS OF OPERATIONS
For the Year Ended December 31, 1999
<TABLE>
<CAPTION>
Select
Aggressive Select Select Growth
Growth Growth and Income
------------- ------------- -------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends .............................................................. $ -- $ 203,047 $ 3,728,869
------------- ------------- -------------
EXPENSES:
Mortality and expense risk fees ........................................ 3,018,333 4,843,128 4,156,950
Administrative expense fees ............................................ 373,052 598,589 513,781
------------- ------------- -------------
Total expenses ....................................................... 3,391,385 5,441,717 4,670,731
------------- ------------- -------------
Net investment income (loss) ......................................... (3,391,385) (5,238,670) (941,862)
------------- ------------- -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain distributions from portfolio sponsors .................... -- 12,903,330 24,961,950
Net realized gain (loss) from sales of investments ..................... 39,540,971 14,932,227 4,050,502
------------- ------------- -------------
Net realized gain (loss) ............................................ 39,540,971 27,835,557 29,012,452
Net unrealized gain (loss) ............................................. 45,108,171 80,513,411 23,575,138
------------- ------------- -------------
Net realized and unrealized gain (loss) ............................. 84,649,142 108,348,968 52,587,590
------------- ------------- -------------
Net increase (decrease) in net assets from operations ................ $81,257,757 $ 103,110,298 $ 51,645,728
------------- ------------- -------------
------------- ------------- -------------
<CAPTION>
Select
Select Money International
Income Market Equity
------------- ------------- -------------
<C> <C> <C>
INVESTMENT INCOME:
Dividends .............................................................. $ 9,286,533 $ 6,779,962 $ --
------------- ------------- -------------
EXPENSES:
Mortality and expense risk fees ........................................ 1,846,045 1,675,937 2,313,411
Administrative expense fees ............................................ 228,163 207,138 285,927
------------- ------------- -------------
Total expenses ....................................................... 2,074,208 1,883,075 2,599,338
------------- ------------- -------------
Net investment income (loss) ......................................... 7,212,325 4,896,887 (2,599,338)
------------- ------------- -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain distributions from portfolio sponsors .................... 1,147,781 -- --
Net realized gain (loss) from sales of investments ..................... (405,783) -- 35,216,024
------------- ------------- -------------
Net realized gain (loss) ............................................ 741,998 -- 35,216,024
Net unrealized gain (loss) ............................................. (11,289,090) -- 20,440,939
------------- ------------- -------------
Net realized and unrealized gain (loss) ............................. (10,547,092) -- 55,656,963
------------- ------------- -------------
Net increase (decrease) in net assets from operations ................ $ (3,334,767) $ 4,896,887 $ 53,057,625
------------- ------------- -------------
------------- ------------- -------------
<CAPTION>
Select Select
Capital Emerging
Appreciation Markets
------------- -------------
<C> <C>
INVESTMENT INCOME:
Dividends .............................................................. $ -- $ 63,318
------------- -------------
EXPENSES:
Mortality and expense risk fees ........................................ 1,442,088 113,457
Administrative expense fees ............................................ 178,236 14,023
------------- -------------
Total expenses ....................................................... 1,620,324 127,480
------------- -------------
Net investment income (loss) ......................................... (1,620,324) (64,162)
------------- -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain distributions from portfolio sponsors .................... 175,189 --
Net realized gain (loss) from sales of investments ..................... 3,879,467 62,828
------------- -------------
Net realized gain (loss) ............................................ 4,054,656 62,828
Net unrealized gain (loss) ............................................. 24,372,518 4,991,227
------------- -------------
Net realized and unrealized gain (loss) ............................. 28,427,174 5,054,055
------------- -------------
Net increase (decrease) in net assets from operations ................ $ 26,806,850 $ 4,989,893
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-3
<PAGE>
ALLMERICA SELECT SEPARATE ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
Select Select Alliance
Value Strategic Premier Fidelity VIP
Opportunity Growth Growth* High Income
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends ................................................... $ 169 $ 53,846 $ -- $ 9,709,230
------------ ------------ ------------ ------------
EXPENSES:
Mortality and expense risk fees ............................. 369,054 160,660 4,767 1,480,008
Administrative expense fees ................................. 45,613 19,856 589 182,922
------------ ------------ ------------ ------------
Total expenses ............................................ 414,667 180,516 5,356 1,662,930
------------ ------------ ------------ ------------
Net investment income (loss) .............................. (414,498) (126,670) (5,356) 8,046,300
------------ ------------ ------------ ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain distributions from portfolio sponsors ......... 1,692,360 -- -- 362,962
Net realized gain (loss) from sales of investments .......... (1,502,575) 39,567 367 (813,305)
------------ ------------ ------------ ------------
Net realized gain (loss) .................................. 189,785 39,567 367 (450,343)
Net unrealized gain (loss) .................................. (996,153) 2,085,609 373,402 (335,164)
------------ ------------ ------------ ------------
Net realized and unrealized gain (loss) .................. (806,368) 2,125,176 373,769 (785,507)
------------ ------------ ------------ ------------
Net increase (decrease) in net assets from operations ..... $ (1,220,866) $ 1,998,506 $ 368,413 $ 7,260,793
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
<CAPTION>
T. Rowe Price
Fidelity VIP Fidelity VIP International
Equity-Income Growth Stock
------------ ------------ ------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends ................................................... $ 2,715,163 $ 275,171 $ 324,142
------------ ------------ ------------
EXPENSES:
Mortality and expense risk fees ............................. 2,605,002 2,549,237 843,850
Administrative expense fees ................................. 321,967 315,074 104,296
------------ ------------ ------------
Total expenses ............................................ 2,926,969 2,864,311 948,146
------------ ------------ ------------
Net investment income (loss) .............................. (211,806) (2,589,140) (624,004)
------------ ------------ ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain distributions from portfolio sponsors ......... 6,001,940 17,301,381 1,018,731
Net realized gain (loss) from sales of investments .......... 1,611,125 1,626,132 12,364,136
------------ ------------ ------------
Net realized gain (loss) .................................. 7,613,065 18,927,513 13,382,867
Net unrealized gain (loss) .................................. 910,958 50,612,325 9,156,450
------------ ------------ ------------
Net realized and unrealized gain (loss) .................. 8,524,023 69,539,838 22,539,317
------------ ------------ ------------
Net increase (decrease) in net assets from operations ..... $ 8,312,217 $ 66,950,698 $ 21,915,313
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
* For the period 10/6/99 to 12/31/99.
The accompanying notes are an integral part of these financial statements.
SA-4
<PAGE>
ALLMERICA SELECT SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Select
Aggressive Growth Select Growth
Year Ended December 31, Year Ended December 31,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) .................................... $ (3,391,385) $ (2,962,901) $ (5,238,670) $ (3,459,314)
Net realized gain (loss) ........................................ 39,540,971 3,969,770 27,835,557 6,072,884
Net unrealized gain (loss) ...................................... 45,108,171 17,405,709 80,513,411 74,575,052
------------- ------------- ------------- -------------
Net increase (decrease) in net assets from operations .......... 81,257,757 18,412,578 103,110,298 77,188,622
------------- ------------- ------------- -------------
FROM CONTRACT TRANSACTIONS:
Net purchase payments ........................................... 24,255,918 36,061,562 56,468,347 70,613,422
Withdrawals ..................................................... (21,732,026) (13,438,781) (28,886,868) (15,891,976)
Contract benefits ............................................... (3,115,459) (2,728,888) (6,001,518) (3,404,074)
Contract charges ................................................ (92,474) (89,767) (116,966) (89,116)
Transfers between sub-accounts (including fixed account), net ... (9,064,037) (7,180,823) (2,504,767) 266,856
Other transfers from (to) the General Account ................... 7,017,452 1,134,404 20,488,160 1,932,745
Net increase (decrease) in investment by Sponsor ................ -- -- -- --
------------- ------------- ------------- -------------
Net increase (decrease) in net assets from contract transactions. (2,730,626) 13,757,707 39,446,388 53,427,857
------------- ------------- ------------- -------------
Net increase (decrease) in net assets ........................... 78,527,131 32,170,285 142,556,686 130,616,479
NET ASSETS:
Beginning of year ............................................... 228,648,337 196,478,052 336,652,400 206,035,921
------------- ------------- ------------- -------------
End of year ..................................................... $ 307,175,468 $ 228,648,337 $ 479,209,086 $ 336,652,400
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
<CAPTION>
Select Growth and Income Select Income
Year Ended December 31, Year Ended December 31,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ..................................... $ (941,862) $ (335,924) $ 7,212,325 $ 5,303,429
Net realized gain (loss) ......................................... 29,012,452 1,988,959 741,998 191,685
Net unrealized gain (loss) ....................................... 23,575,138 32,750,667 (11,289,090) 575,603
------------- ------------- ------------- -------------
Net increase (decrease) in net assets from operations ........... 51,645,728 34,403,702 (3,334,767) 6,070,717
------------- ------------- ------------- -------------
FROM CONTRACT TRANSACTIONS:
Net purchase payments ............................................ 48,537,477 63,681,715 24,820,260 43,005,439
Withdrawals ...................................................... (24,493,254) (15,115,743) (13,453,696) (8,082,420)
Contract benefits ................................................ (6,377,979) (4,138,997) (2,636,252) (1,772,510)
Contract charges ................................................. (99,080) (85,677) (43,282) (37,909)
Transfers between sub-accounts (including fixed account), net .... (8,982,046) 106,049 (11,621,085) 3,617,459
Other transfers from (to) the General Account .................... 20,470,398 3,902,001 14,208,620 3,052,759
Net increase (decrease) in investment by Sponsor ................. -- -- -- --
------------- ------------- ------------- -------------
Net increase (decrease) in net assets from contract transactions . 29,055,516 48,349,348 11,274,565 39,782,818
------------- ------------- ------------- -------------
Net increase (decrease) in net assets ............................ 80,701,244 82,753,050 7,939,798 45,853,535
NET ASSETS:
Beginning of year ................................................ 295,926,306 213,173,256 140,034,473 94,180,938
------------- ------------- ------------- -------------
End of year ...................................................... $ 376,627,550 $ 295,926,306 $ 147,974,271 $ 140,034,473
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
<CAPTION>
Money Market
Year Ended December 31,
1999 1998
------------- -------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ..................................... $ 4,896,887 $ 3,859,624
Net realized gain (loss) ......................................... -- --
Net unrealized gain (loss) ....................................... -- --
------------- -------------
Net increase (decrease) in net assets from operations ........... 4,896,887 3,859,624
------------- -------------
FROM CONTRACT TRANSACTIONS:
Net purchase payments ............................................ 58,002,004 65,100,611
Withdrawals ...................................................... (34,935,305) (20,168,912)
Contract benefits ................................................ (8,743,929) (5,486,115)
Contract charges ................................................. (32,442) (24,776)
Transfers between sub-accounts (including fixed account), net .... 23,841,962 (7,256,363)
Other transfers from (to) the General Account .................... 4,765,007 645,196
Net increase (decrease) in investment by Sponsor ................. -- --
------------- -------------
Net increase (decrease) in net assets from contract transactions . 42,897,297 32,809,641
------------- -------------
Net increase (decrease) in net assets ............................ 47,794,184 36,669,265
NET ASSETS:
Beginning of year ................................................ 113,815,089 77,145,824
------------- -------------
End of year ...................................................... $ 161,609,273 $ 113,815,089
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-5
<PAGE>
ALLMERICA SELECT SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
Select Select
International Equity Capital Appreciation
Year Ended December 31, Year Ended December 31,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ..................................... $ (2,599,338) $ 7,654 $ (1,620,324) $ (1,175,589)
Net realized gain (loss) ......................................... 35,216,024 1,650,381 4,054,656 16,587,627
Net unrealized gain (loss) ....................................... 20,440,939 17,773,061 24,372,518 (4,726,710)
------------- ------------- ------------- -------------
Net increase (decrease) in net assets from operations ........... 53,057,625 19,431,096 26,806,850 10,685,328
------------- ------------- ------------- -------------
FROM CONTRACT TRANSACTIONS:
Net purchase payments ............................................ 22,969,590 29,615,052 20,479,493 25,436,320
Withdrawals ...................................................... (12,716,071) (8,122,159) (7,003,864) (3,623,727)
Contract benefits ................................................ (2,279,246) (1,791,387) (1,657,807) (1,106,068)
Contract charges ................................................. (60,729) (56,589) (37,408) (30,776)
Transfers between sub-accounts (including fixed account), net .... (7,267,716) (5,116,809) (2,237,250) (2,261,255)
Other transfers from (to) the General Account .................... 9,337,645 1,294,775 6,878,405 654,274
Net increase (decrease) in investment by Sponsor ................. -- -- -- --
------------- ------------- ------------- -------------
Net increase (decrease) in net assets from contract transactions . 9,983,473 15,822,883 16,421,569 19,068,768
------------- ------------- ------------- -------------
Net increase (decrease) in net assets ............................ 63,041,098 35,253,979 43,228,419 29,754,096
NET ASSETS:
Beginning of year ................................................ 165,703,596 130,449,617 102,870,665 73,116,569
------------- ------------- ------------- -------------
End of year ...................................................... $ 228,744,694 $ 165,703,596 $ 146,099,084 $ 102,870,665
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
<CAPTION>
Select
Emerging Markets
Year Ended Period From
12/31/99 2/20/98* TO 12/31/98
------------- --------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ..................................... $ (64,162) $ (15,971)
Net realized gain (loss) ......................................... 62,828 (24,720)
Net unrealized gain (loss) ....................................... 4,991,227 (309,858)
------------- --------------------
Net increase (decrease) in net assets from operations ........... 4,989,893 (350,549)
------------- --------------------
FROM CONTRACT TRANSACTIONS:
Net purchase payments ............................................ 4,785,976 3,000,520
Withdrawals ...................................................... (368,856) (61,386)
Contract benefits ................................................ (82,822) (9,898)
Contract charges ................................................. (2,679) (134)
Transfers between sub-accounts (including fixed account), net .... 3,126,568 1,172,968
Other transfers from (to) the General Account .................... 1,899,441 291,059
Net increase (decrease) in investment by Sponsor ................. -- --
------------- --------------------
Net increase (decrease) in net assets from contract transactions . 9,357,628 4,393,129
------------- --------------------
Net increase (decrease) in net assets ............................ 14,347,521 4,042,580
NET ASSETS:
Beginning of year ................................................ 4,042,580 --
------------- --------------------
End of year ...................................................... $ 18,390,101 $ 4,042,580
------------- --------------------
------------- --------------------
<CAPTION>
Select
Value Opportunity
Year Ended Period From
12/31/99 2/20/98* TO 12/31/98
------------- --------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ..................................... $ (414,498) $ 49,651
Net realized gain (loss) ......................................... 189,785 (3,663)
Net unrealized gain (loss) ....................................... (996,153) 160,234
------------- --------------------
Net increase (decrease) in net assets from operations ........... (1,220,866) 206,222
------------- --------------------
FROM CONTRACT TRANSACTIONS:
Net purchase payments ............................................ 16,094,140 12,809,082
Withdrawals ...................................................... (1,105,798) (356,168)
Contract benefits ................................................ (412,758) (49,956)
Contract charges ................................................. (6,920) (478)
Transfers between sub-accounts (including fixed account), net .... 2,467,165 4,206,999
Other transfers from (to) the General Account .................... 6,882,082 1,218,807
Net increase (decrease) in investment by Sponsor ................. -- --
------------- --------------------
Net increase (decrease) in net assets from contract transactions . 23,917,911 17,828,286
------------- --------------------
Net increase (decrease) in net assets ............................ 22,697,045 18,034,508
NET ASSETS:
Beginning of year ................................................ 18,034,508 --
------------- --------------------
End of year ...................................................... $ 40,731,553 $ 18,034,508
------------- --------------------
------------- --------------------
<CAPTION>
Select
Strategic Growth
Year Ended Period From
12/31/99 2/20/98* TO 12/31/98
------------- --------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ..................................... $ (126,670) $ (28,486)
Net realized gain (loss) ......................................... 39,567 (151,091)
Net unrealized gain (loss) ....................................... 2,085,609 219,846
------------- --------------------
Net increase (decrease) in net assets from operations ........... 1,998,506 40,269
------------- --------------------
FROM CONTRACT TRANSACTIONS:
Net purchase payments ............................................ 7,433,586 5,671,296
Withdrawals ...................................................... (679,903) (209,854)
Contract benefits ................................................ (83,051) (20,535)
Contract charges ................................................. (3,223) (338)
Transfers between sub-accounts (including fixed account), net .... (49,588) 2,187,617
Other transfers from (to) the General Account .................... 2,524,904 723,590
Net increase (decrease) in investment by Sponsor ................. -- --
------------- --------------------
Net increase (decrease) in net assets from contract transactions . 9,142,725 8,351,776
------------- --------------------
Net increase (decrease) in net assets ............................ 11,141,231 8,392,045
NET ASSETS:
Beginning of year ................................................ 8,392,045 --
------------- --------------------
End of year ...................................................... $ 19,533,276 $ 8,392,045
------------- --------------------
------------- --------------------
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-6
<PAGE>
ALLMERICA SELECT SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
Alliance
Premier Growth
Period from
10/6/99* to 12/31/99
--------------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ..................................... $ (5,356)
Net realized gain (loss) ......................................... 367
Net unrealized gain (loss) ....................................... 373,402
--------------------
Net increase (decrease) in net assets from operations ........... 368,413
--------------------
FROM CONTRACT TRANSACTIONS:
Net purchase payments ............................................ 6,222,365
Withdrawals ...................................................... (196,510)
Contract benefits ................................................ --
Contract charges ................................................. (670)
Transfers between sub-accounts (including fixed account), net .... --
Other transfers from (to) the General Account .................... 172,591
Net increase (decrease) in investment by Sponsor ................. (3)
--------------------
Net increase (decrease) in net assets from contract transactions . 6,197,773
--------------------
Net increase (decrease) in net assets ............................ 6,566,186
NET ASSETS:
Beginning of year ................................................ --
--------------------
End of year ...................................................... $ 6,566,186
--------------------
--------------------
<CAPTION>
Fidelity VIP High Income Fidelity VIP Equity-Income
Year Ended December 31, Year Ended December 31,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ..................................... $ 8,046,300 $ 4,194,465 $ (211,806) $ (415,937)
Net realized gain (loss) ......................................... (450,343) 3,061,179 7,613,065 6,181,847
Net unrealized gain (loss) ....................................... (335,164) (13,622,064) 910,958 7,180,318
------------- ------------- ------------- -------------
Net increase (decrease) in net assets from operations ........... 7,260,793 (6,366,420) 8,312,217 12,946,228
------------- ------------- ------------- -------------
FROM CONTRACT TRANSACTIONS:
Net purchase payments ............................................ 21,260,358 33,755,346 38,502,384 57,177,724
Withdrawals ...................................................... (8,950,671) (4,291,123) (13,886,488) (6,972,862)
Contract benefits ................................................ (2,314,938) (1,095,080) (3,567,803) (1,970,745)
Contract charges ................................................. (32,098) (24,772) (56,448) (41,629)
Transfers between sub-accounts (including fixed account), net .... (1,926,907) 5,384,061 (4,177,665) 3,401,689
Other transfers from (to) the General Account .................... 9,311,665 1,643,387 19,756,379 3,352,791
Net increase (decrease) in investment by Sponsor ................. -- -- -- --
------------- ------------- ------------- -------------
Net increase (decrease) in net assets from contract transactions . 17,347,409 35,371,819 36,570,359 54,946,968
------------- ------------- ------------- -------------
Net increase (decrease) in net assets ............................ 24,608,202 29,005,399 44,882,576 67,893,196
NET ASSETS:
Beginning of year ................................................ 101,203,216 72,197,817 178,330,222 110,437,026
------------- ------------- ------------- -------------
End of year ...................................................... $ 125,811,418 $ 101,203,216 $ 223,212,798 $ 178,330,222
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
<CAPTION>
T. Rowe Price
Fidelity VIP Growth International Stock
Year Ended December 31, Year Ended December 31,
1999 1998 1999 1998
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ..................................... $ (2,589,140) $ (1,086,153) $ (624,004) $ (41,275)
Net realized gain (loss) ......................................... 18,927,513 11,869,942 13,382,867 385,253
Net unrealized gain (loss) ....................................... 50,612,325 25,112,290 9,156,450 5,788,775
------------- ------------- ------------ ------------
Net increase (decrease) in net assets from operations ........... 66,950,698 35,896,079 21,915,313 6,132,753
------------- ------------- ------------ ------------
FROM CONTRACT TRANSACTIONS:
Net purchase payments ............................................ 51,086,036 35,768,091 12,519,911 14,149,159
Withdrawals ...................................................... (13,782,325) (5,164,629) (4,048,055) (2,057,947)
Contract benefits ................................................ (3,164,854) (1,505,737) (951,093) (649,684)
Contract charges ................................................. (58,541) (37,556) (21,525) (18,009)
Transfers between sub-accounts (including fixed account), net .... 19,475,643 3,426,882 (894,900) (1,989,024)
Other transfers from (to) the General Account .................... 17,547,185 1,296,933 5,061,257 812,777
Net increase (decrease) in investment by Sponsor ................. -- -- -- --
------------- ------------- ------------ ------------
Net increase (decrease) in net assets from contract transactions . 71,103,144 33,783,984 11,665,595 10,247,272
------------- ------------- ------------ ------------
Net increase (decrease) in net assets ............................ 138,053,842 69,680,063 33,580,908 16,380,025
NET ASSETS:
Beginning of year ................................................ 147,531,533 77,851,470 57,943,955 41,563,930
------------- ------------- ------------ ------------
End of year ...................................................... $ 285,585,375 $ 147,531,533 $ 91,524,863 $ 57,943,955
------------- ------------- ------------ ------------
------------- ------------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-7
<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 fifteen 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), a
wholly-owned subsidiary of the Company; or of the Alliance Variable Products
Series Fund, Inc.(Alliance) managed by Alliance Capital Management L.P.; 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, Alliance, Fidelity VIP, and T. Rowe Price (the Funds) are open-end,
diversified management investment companies registered under the 1940 Act.
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. 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-8
<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, 1999 were as follows:
<TABLE>
<CAPTION>
Portfolio Information
--------------------------------------------------------------
Net Asset
Number of Aggregate Value
Investment Portfolio Shares Cost Per Share
-------------------- ----------- ------------ ---------
<S> <C> <C> <C>
Select Aggressive Growth ........ 90,058,975 $209,913,818 $ 3.411
Select Growth ................... 157,184,618 281,077,108 3.049
Select Growth and Income ........ 194,907,413 288,280,073 1.933
Select Income ................... 155,283,933 156,838,773 0.953
Money Market .................... 161,507,693 161,507,693 1.000
Select International Equity ..... 112,636,966 181,080,480 2.031
Select Capital Appreciation ..... 71,171,442 117,150,392 2.053
Select Emerging Markets ......... 14,246,523 13,725,139 1.292
Select Value Opportunity ........ 26,793,321 41,588,560 1.521
Select Strategic Growth ......... 17,352,214 17,233,138 1.126
Alliance Premier Growth ......... 162,719 6,208,580 40.450
Fidelity VIP High Income ........ 11,126,220 133,018,263 11.310
Fidelity VIP Equity-Income ...... 8,683,516 199,719,712 25.710
Fidelity VIP Growth ............. 5,199,368 199,026,231 54.930
T. Rowe Price International Stock 4,807,671 76,910,552 19.040
</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. For contracts issued on
Form A3027-98 (Allmerica Select Charter) and on Form A3028-99 (Allmerica Select
Reward), a contract fee is deducted on the contract anniversary and upon full
surrender if the accumulated value is less than $75,000. The fee is currently
waived for Allmerica Select Resource II and Select Reward contracts issued to
and maintained by the trustee of a 401(k) plan.
Allmerica Investments, Inc., (Allmerica Investments), a wholly-owned
subsidiary of the Company, 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 and
Allmerica Select Reward contracts have a contingent deferred sales charge and no
deduction is made for sales charges at the time of the sale.
SA-9
<PAGE>
ALLMERICA SELECT SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE 5 - CONTRACTOWNERS AND SPONSOR TRANSACTIONS (Continued)
Transactions from contractowners and sponsor were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998
--------------------------------- ---------------------------------
UNITS AMOUNT UNITS AMOUNT
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Select Aggressive Growth
Issuance of Units .................................. 75,252,384 $ 215,594,821 28,443,354 $ 71,461,752
Redemption of Units ................................ (76,759,554) (218,325,447) (22,974,119) (57,704,045)
--------------- --------------- --------------- ---------------
Net increase (decrease) .......................... (1,507,170) $ (2,730,626) 5,469,235 $ 13,757,707
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
Select Growth
Issuance of Units .................................. 53,807,629 $ 161,684,575 48,669,777 $ 117,987,024
Redemption of Units ................................ (40,286,966) (122,238,187) (26,664,319) (64,559,167)
--------------- --------------- --------------- ---------------
Net increase (decrease) .......................... 13,520,663 $ 39,446,388 22,005,458 $ 53,427,857
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
Select Growth and Income
Issuance of Units .................................. 41,734,130 $ 102,259,914 45,914,205 $ 99,392,688
Redemption of Units ................................ (30,125,418) (73,204,398) (23,587,262) (51,043,340)
--------------- --------------- --------------- ---------------
Net increase (decrease) .......................... 11,608,712 $ 29,055,516 22,326,943 $ 48,349,348
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
Select Income
Issuance of Units .................................. 48,275,738 $ 63,597,852 59,979,984 $ 80,651,018
Redemption of Units ................................ (40,009,593) (52,323,287) (30,202,528) (40,868,200)
--------------- --------------- --------------- ---------------
Net increase (decrease) .......................... 8,266,145 $ 11,274,565 29,777,456 $ 39,782,818
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
Money Market
Issuance of Units .................................. 628,585,498 $ 835,137,989 160,175,464 $ 193,712,183
Redemption of Units ................................ (594,333,800) (792,240,692) (132,822,470) (160,902,542)
--------------- --------------- --------------- ---------------
Net increase (decrease) .......................... 34,251,698 $ 42,897,297 27,352,994 $ 32,809,641
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
Select International Equity
Issuance of Units .................................. 164,673,863 $ 284,544,051 35,836,093 $ 56,782,369
Redemption of Units ................................ (158,190,366) (274,560,578) (25,978,288) (40,959,486)
--------------- --------------- --------------- ---------------
Net increase (decrease) .......................... 6,483,497 $ 9,983,473 9,857,805 $ 15,822,883
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
Select Capital Appreciation
Issuance of Units .................................. 39,275,736 $ 78,604,034 25,684,264 $ 44,175,487
Redemption of Units ................................ (31,115,549) (62,182,465) (14,627,907) (25,106,719)
--------------- --------------- --------------- ---------------
Net increase (decrease) .......................... 8,160,187 $ 16,421,569 11,056,357 $ 19,068,768
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
Select Emerging Markets
Issuance of Units .................................. 12,741,433 $ 12,693,100 6,117,004 $ 5,235,588
Redemption of Units ................................ (3,448,629) (3,335,472) (907,615) (842,459)
--------------- --------------- --------------- ---------------
Net increase (decrease) .......................... 9,292,804 $ 9,357,628 5,209,389 $ 4,393,129
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
Select Value Opportunity
Issuance of Units .................................. 55,225,027 $ 50,439,314 20,566,820 $ 20,586,826
Redemption of Units ................................ (29,625,233) (26,521,403) (2,327,244) (2,758,540)
--------------- --------------- --------------- ---------------
Net increase (decrease) .......................... 25,599,794 $ 23,917,911 18,239,576 $ 17,828,286
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
SA-10
<PAGE>
ALLMERICA SELECT SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS (Continued)
Note 5 - CONTRACTOWNERS AND SPONSOR TRANSACTIONS (Continued)
<CAPTION>
Year Ended December 31,
1999 1998
--------------------------------- ---------------------------------
UNITS AMOUNT UNITS AMOUNT
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Select Strategic Growth
Issuance of Units .................................. 13,362,189 $ 13,598,310 10,583,703 $ 10,307,180
Redemption of Units ................................ (4,358,489) (4,455,585) (1,875,191) (1,955,404)
--------------- --------------- --------------- ---------------
Net increase (decrease) .......................... 9,003,700 $ 9,142,725 8,708,512 $ 8,351,776
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
Alliance Premier Growth
Issuance of Units .................................. 5,570,878 $ 6,498,202 - $ -
Redemption of Units ................................ (261,505) (300,429) - -
--------------- --------------- --------------- ---------------
Net increase (decrease) .......................... 5,309,373 $ 6,197,773 - $ -
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
Fidelity VIP High Income
Issuance of Units .................................. 38,346,359 $ 53,501,177 42,299,742 $ 60,272,832
Redemption of Units ................................ (25,918,736) (36,153,768) (17,784,384) (24,901,013)
--------------- --------------- --------------- ---------------
Net increase (decrease) .......................... 12,427,623 $ 17,347,409 24,515,358 $ 35,371,819
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
Fidelity VIP Equity-Income
Issuance of Units .................................. 46,507,097 $ 91,172,489 48,319,788 $ 87,225,760
Redemption of Units ................................ (27,985,168) (54,602,130) (17,913,028) (32,278,792)
--------------- --------------- --------------- ---------------
Net increase (decrease) .......................... 18,521,929 $ 36,570,359 30,406,760 $ 54,946,968
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
Fidelity VIP Growth
Issuance of Units .................................. 47,634,153 $ 125,046,338 32,964,840 $ 65,335,816
Redemption of Units ................................ (20,618,401) (53,943,194) (15,681,080) (31,551,832)
--------------- --------------- --------------- ---------------
Net increase (decrease) .......................... 27,015,752 $ 71,103,144 17,283,760 $ 33,783,984
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
T. Rowe Price International Stock
Issuance of Units .................................. 115,271,622 $ 173,722,453 17,721,810 $ 23,965,360
Redemption of Units ................................ (106,914,833) (162,056,858) (10,241,106) (13,718,088)
--------------- --------------- --------------- ---------------
Net increase (decrease) .......................... 8,356,789 $ 11,665,595 7,480,704 $ 10,247,272
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
</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-11
<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, 1999 were as follows:
<TABLE>
<CAPTION>
Investment Portfolio Purchases Sales
-------------------- -------------- --------------
<S> <C> <C>
Select Aggressive Growth ......................... $157,193,601 $163,300,688
Select Growth .................................... 90,300,034 43,194,032
Select Growth and Income ......................... 71,305,013 18,086,672
Select Income .................................... 35,830,544 16,211,638
Money Market ..................................... 666,899,848 619,252,030
Select International Equity ...................... 244,433,761 237,028,642
Select Capital Appreciation ...................... 52,799,447 37,807,126
Select Emerging Markets .......................... 9,928,319 618,446
Select Value Opportunity ......................... 43,234,342 18,017,481
Select Strategic Growth .......................... 10,240,619 1,219,247
Alliance Premier Growth .......................... 6,225,899 17,686
Fidelity VIP High Income ......................... 37,231,381 11,448,574
Fidelity VIP Equity-Income ....................... 56,271,017 13,870,121
Fidelity VIP Growth .............................. 93,710,387 7,879,073
T. Rowe Price International Stock ................ 155,651,465 143,577,942
-------------- --------------
Totals ......................................... $1,731,255,677 $1,331,529,398
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NOTE 8 - PLAN OF SUBSTITUTION FOR PORTFOLIO OF THE TRUST
An application has been filed with the Securities and Exchange Commission
(SEC) seeking an order approving the substitution of shares of the Select
Investment Grade Income Fund (SIGIF) for all of the shares of the Select Income
Fund (SIF). To the extent required by law, approvals of such substitution will
also be obtained from the state insurance regulators in certain jurisdictions.
The effect of the substitution will be to replace SIF shares with SIGIF shares.
The substitution is planned to be effective on or about July 1, 2000.
SA-12
