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File Number 33-47858
811-6666
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 9
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 9
SEPARATE ACCOUNT I OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(Exact Name of Trust)
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
440 Lincoln Street
Worcester Massachusetts 01653
(508) 855-1000
(Registrant's telephone number including area code)
Abigail M. Armstrong, Secretary and Counsel
First Allmerica Financial Life Insurance Company
440 Lincoln Street
Worcester Massachusetts 01653
(Name and complete address of agent for service)
It is proposed that this filing will become effective:
immediately upon filing pursuant to Paragraph (b)
---
x on May 1, 1997 pursuant to Paragraph (b)
---
60 days after filing pursuant to Paragraph (a) (1)
---
on (date) pursuant to Paragraph (a) (1)
---
on (date) pursuant to Paragraph (a) (2) of Rule 485
---
VARIABLE ANNUITY CONTRACTS
Pursuant to Reg. Section 270.24f-2 of the Investment Company Act of 1940,
Registrant hereby declares that an indefinite amount of its securities is being
registered under the Securities Act of 1933. The Rule 24f-2 Notice for the
issuer's fiscal year ended December 31, 1996 will be filed on or before
February 28, 1997.
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CROSS REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS OF
ITEMS CALLED FOR BY FORM N-4
FORM N-4 ITEM NO. CAPTION IN PROSPECTUS
- ----------------- ---------------------
1. . . . . . . . Cover Page
2. . . . . . . . "Special Terms"
3. . . . . . . . "Summary"; "Annual and Transaction Expenses"
4. . . . . . . . "Condensed Financial Information"; "Performance Information"
5. . . . . . . . "Description of the Company, the Separate Account, the
Trust, and T. Rowe Price
6. . . . . . . . "Charges and Deductions:
7. . . . . . . . "Description of the Contract"
8. . . . . . . . The Variable Annuity Policies
9. . . . . . . . "Death Benefit"
10 . . . . . . . "Purchase Payments"; "Computation of IRA Account Values and
Annuity Payments"
11 . . . . . . . "Surrender"; "Partial Redemption"
12 . . . . . . . "Federal Tax Considerations"
13 . . . . . . . "Legal Matters"
14 . . . . . . . "Statement of Additional Information-Table of Contents"
FORM N-4 ITEM NO. CAPTION IN STATEMENT OF ADDITIONAL INFORMATION
- ----------------- ----------------------------------------------
15 . . . . . . . "Cover Page"
16 . . . . . . . "Table of Contents"
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17 . . . . . . . "General Information and History"
18 . . . . . . . "Services"
19 . . . . . . . "Underwriters"
20 . . . . . . . "Underwriters"
21 . . . . . . . "Performance Information"
22 . . . . . . . "Annuity Payments"
23 . . . . . . . "Financial Statements"
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
GROUP VARIABLE ANNUITY CONTRACTS FUNDED THROUGH SEPARATE ACCOUNT I
This Prospectus describes group variable annuity contracts ("Contracts") offered
by First Allmerica Financial Life Insurance Company ("Company"). Each Contract
establishes individual retirement annuities ("IRA Accounts") qualified under
Section 408(b) of the Internal Revenue Code ("Code") for the benefit of
Participant-Owners. For information about the tax status of IRA Accounts, see
"FEDERAL TAX CONSIDERATIONS." The Participant-Owners are employees or former
employees (or their spouses, for spousal IRAs) of the Policyholder. An
individual certificate of coverage ("Certificate") will be issued to each
Participant-Owner (hereinafter, referred to as "You") as evidence of your rights
and benefits under the Contract.
The Contracts permit You to make net contributions to each IRA Account to be
allocated among Sub-Accounts of Separate Account I. The Sub-Accounts invest in
the following funds ("Funds") of Allmerica Investment Trust ("Trust"):
ALLMERICA INVESTMENT TRUST
Select International Equity Fund
Select Aggressive Growth Fund
Growth Fund
Equity Index Fund
Investment Grade Income Fund
Government Bond Fund
Money Market Fund
This Prospectus generally describes only the variable accumulation aspects of
the Contracts, except where General Account interests, including fixed values
and annuity payments, are specifically mentioned. ALLOCATIONS TO AND TRANSFERS
TO AND FROM THE GENERAL ACCOUNT ARE NOT PERMITTED IN CERTAIN STATES. Certain
additional information about the Contracts is contained in a Statement of
Additional Information, dated May 1, 1997, as amended from time to time, which
has been filed with the Securities and Exchange Commission and is incorporated
herein by reference. The Table of Contents for the Statement of Additional
Information is listed on page 2 of this Prospectus. The Statement of Additional
Information is available upon request and without charge. To obtain the
Statement of Additional Information, contact Allmerica Institutional Services,
Station C-36, First Allmerica Financial Life Insurance Company, 440 Lincoln
Street, Worcester, Massachusetts 01653, 1-800-533-7865.
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY A CURRENT PROSPECTUS OF
ALLMERICA INVESTMENT TRUST. INVESTORS SHOULD RETAIN A COPY OF THIS PROSPECTUS
FOR FUTURE REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE CONTRACTS ARE OBLIGATIONS OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE
COMPANY AND ARE DISTRIBUTED BY ITS SUBSIDIARY, ALLMERICA INVESTMENTS, INC. THE
CONTRACTS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY
BANK OR CREDIT UNION. THE CONTRACTS ARE NOT INSURED BY THE U.S. GOVERNMENT, THE
FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC), OR ANY OTHER FEDERAL AGENCY.
INVESTMENT IN THE CONTRACTS ARE SUBJECT TO VARIOUS RISKS, INCLUDING THE
FLUCTUATION OF VALUE AND POSSIBLE LOSS OF PRINCIPAL.
DATED MAY 1, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION......................... 2
SUMMARY.............................................................................. 3
SPECIAL TERMS........................................................................ 6
ANNUAL AND TRANSACTION EXPENSES...................................................... 7
CONDENSED FINANCIAL INFORMATION...................................................... 9
PERFORMANCE INFORMATION.............................................................. 10
WHAT IS AN INDIVIDUAL RETIREMENT ANNUITY?............................................ 11
RIGHT TO REVOKE INDIVIDUAL RETIREMENT ANNUITY........................................ 11
DESCRIPTION OF THE COMPANY, THE SEPARATE ACCOUNT, AND THE TRUST...................... 12
Investment Objectives and Policies................................................. 13
Investment Advisory Services to the Trust.......................................... 14
Addition, Deletion, Substitution of Investments.................................... 15
VOTING RIGHTS........................................................................ 16
CHARGES AND DEDUCTIONS............................................................... 16
Surrender and Redemption Charge.................................................... 16
Premium Taxes...................................................................... 17
IRA Account Fee.................................................................... 18
Annual Charges Against Separate Account Assets..................................... 18
Other Charges...................................................................... 19
DESCRIPTION OF THE CONTRACT.......................................................... 19
Contributions...................................................................... 19
Transfer Privilege................................................................. 20
Surrender Privilege................................................................ 21
Redemption Privilege............................................................... 21
Death Benefit...................................................................... 22
The Spouse of the Participant-Owner as Beneficiary................................. 22
Ownership and Non-Alienation of IRA Accounts....................................... 22
Electing the Form of Annuity and the Annuity Date.................................. 22
Description of Annuity Options..................................................... 23
IRA Account Values and Annuity Payments............................................ 24
FEDERAL TAX CONSIDERATIONS........................................................... 25
Taxation of the Contracts in General............................................... 25
Tax Withholding and Penalties...................................................... 26
Individual Retirement Annuities in General......................................... 26
REPORTS.............................................................................. 27
CHANGES IN OPERATION OF THE SEPARATE ACCOUNT......................................... 27
LEGAL MATTERS........................................................................ 28
FURTHER INFORMATION.................................................................. 28
APPENDIX A -- MORE INFORMATION ABOUT THE GENERAL ACCOUNT............................. A-1
STATEMENT OF ADDITIONAL INFORMATION -- TABLE OF CONTENTS
GENERAL INFORMATION AND HISTORY...................................................... 2
TAXATION OF THE SEPARATE ACCOUNT AND THE COMPANY..................................... 3
SERVICES............................................................................. 3
UNDERWRITERS......................................................................... 3
ANNUITY PAYMENTS..................................................................... 4
PERFORMANCE INFORMATION.............................................................. 5
FINANCIAL STATEMENTS................................................................. F-1
</TABLE>
2
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SUMMARY
IRA ACCOUNT
Each IRA Account established under the Contract is intended to be an individual
retirement annuity qualified under Section 408(b) of the Internal Revenue Code
("Code"). See "Individual Retirement Annuities." You may establish an IRA
Account with a rollover distribution from a qualified retirement plan maintained
by the Policyholder. You may also establish an additional IRA Account for your
spouse. Separate IRA Accounts will be maintained under the Contract for rollover
contributions and annual deductible and non-deductible contributions, unless You
request otherwise in writing. A separate Certificate will be issued for each IRA
Account maintained for You.
INVESTMENT OPTIONS
The Contracts permit net contributions to each IRA Account to be allocated among
Sub-Accounts of Separate Account I ("Separate Account"), a separate account of
the Company, and of the General Account, where available. The Separate Account
is registered as a unit investment trust under the Investment Company Act of
1940, as amended, ("1940 Act"), but such registration does not involve the
supervision of the management or investment practices or policies of the
Separate Account by the Securities and Exchange Commission (the "SEC"). For
information about the Separate Account and the Company, see "DESCRIPTION OF THE
COMPANY, THE SEPARATE ACCOUNT, AND THE TRUST." For more information about the
General Account, see APPENDIX A, "MORE INFORMATION ABOUT THE GENERAL ACCOUNT."
Each Sub-Account of the Separate Account invests its assets without sales charge
in a corresponding investment series of Allmerica Investment Trust ("Trust").
The following seven underlying funds ("Funds") are offered under this
Prospectus:
ALLMERICA INVESTMENT TRUST
Select International Equity Fund
Select Aggressive Growth Fund
Growth Fund
Equity Index Fund
Investment Grade Income Fund
Government Bond Fund
Money Market Fund
INVESTMENT IN THE SUB-ACCOUNTS OF THE SEPARATE ACCOUNT
Until the Valuation Date that is 15 days from the date the IRA Account was
established, all Separate Account allocations will be held in the Money Market
Sub-Account. Thereafter, all amounts will be allocated according to your
instructions. The value of each Sub-Account of the Separate Account will vary
daily depending on the performance of the investments made by the respective
Funds. Dividends or capital gains distributions received from a Fund are
reinvested in additional shares of that Fund, which are retained as assets of
the Sub-Account.
There can be no assurance that the investment objectives of the Funds can be
achieved or that the value of an IRA Account will equal or exceed the aggregate
amount of contributions made to the IRA Account. For more information about the
investments of the Funds, see "DESCRIPTION OF THE COMPANY, THE SEPARATE ACCOUNT,
AND THE TRUST." The accompanying prospectus of the Trust describes the
investment objectives and risks of each of the Funds.
3
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TRANSFERS AMONG SUB-ACCOUNTS
The Contracts permit amounts to be transferred prior to the Annuity Date among
the Sub-Accounts of the Separate Account and, where available, the General
Account, subject to certain limitations described under "Transfer Privilege."
ANNUITY PAYMENTS
You may choose the form of annuity benefit to commence on the Annuity Date. All
annuity benefits are funded through the General Account and are guaranteed by
the Company.
See "DESCRIPTION OF THE CONTRACT" for information about annuity payment options,
selecting the Annuity Date, and how annuity payments are calculated.
REVOCATION RIGHTS
You may revoke your IRA Account at any time between the date of the application
for the IRA Account and the date 10 days after receipt of his or her
Certificate. For more information about revocation rights, see "RIGHT TO REVOKE
IRA ACCOUNT."
CONTRIBUTION MINIMUMS AND MAXIMUMS
Under the Contracts, additional contributions are not limited as to frequency
and number, except that certain contributions must be received by the Company by
April 15 of the year following the calendar year to which the contributions are
attributable. See "Contributions."
The minimum initial contribution from a rollover distribution is the lesser of
(1) $3,500, or (2) such smaller amount as meets the Company's then current
rules. The maximum initial contribution is the amount equal to the taxable
portion of your rollover distribution. You may make additional contributions,
subject to the following requirements: The minimum additional contribution is
the lesser of (1) $1,000, or (2) such smaller amount as meets the Company's then
current rules. The maximum additional contributions (both deductible and
nondeductible) for any taxable year to an IRA Account You establish with a
rollover distribution is the lesser of (1) $2,000, or (2) 100% of your
compensation for that taxable year. You may make an additional rollover
contribution. Additional rollover contributions are not subject to maximum
contribution limits.
If You have established an IRA Account, You may also establish a spousal IRA
Account. The maximum total contributions to both IRA accounts in any taxable
year is $2,250, of which amount no more than $2,000 may be contributed to any
one IRA Account.
CHARGES AND DEDUCTIONS
For a complete discussion of charges, see "CHARGES AND DEDUCTIONS."
SURRENDER AND REDEMPTION CHARGE. No sales charge is deducted from contributions
at the time the contributions are made. However, a withdrawal charge of 4% will
be made on any amount withdrawn from a Sub-Account of the General Account on
other than its maturity date, and upon the election of an annuity for a
specified number of years, subject to certain exceptions. No sales charge is
deducted upon withdrawal from any Sub-Account of the Separate Account. In those
states where allocations to and transfers to and from the General Account are
not permitted, no withdrawal charge applies.
PREMIUM TAXES. A deduction for State and local premium taxes, if any, may be
made as described under "Premium Taxes."
ANNUAL IRA ACCOUNT FEE. Prior to the Annuity Date, an IRA Account Fee equal to
$25 will be deducted annually from each IRA Account for administrative expenses.
The fee will be deducted on the last Valuation Date of the month of the
anniversary of the establishment of the IRA Account and on the date the IRA
Account is surrendered.
4
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SEPARATE ACCOUNT ASSET CHARGES. A daily charge, equivalent to 0.90% per annum,
is made on the value of each Sub-Account of the Separate Account at each
Valuation Date. The charge is retained for the mortality and expense risks the
Company assumes. In addition, to cover Separate Account administrative expenses,
the Company deducts a daily charge of 0.25% per annum of the value of the
average net assets in the Sub-Accounts of the Separate Account.
CHARGES OF THE FUNDS. In addition to the charges described above, certain fees
and expenses are deducted from the assets of the Funds. These charges vary among
the Funds; see "Annual and Transaction Expenses" and the prospectus for the
Funds for more information.
SURRENDER AND REDEMPTION PRIVILEGE
At any time before the Annuity Date, You have the right either:
- - to surrender the IRA Account in full and receive its Surrender Value
(Accumulated Value minus the IRA Account Fee and any applicable withdrawal
charge); or
- - to redeem a portion of the Accumulated Value of the IRA Account subject to
certain limits and any applicable withdrawal charge.
DEATH BENEFIT
If You die before the Annuity Date, a death benefit will be paid to the
beneficiary. The death benefit will be equal to the Accumulated Value of the IRA
Account.
SALES OF CONTRACTS AND CERTIFICATES
The Contracts and Certificates thereunder are sold by agents of the Company who
are registered representatives of Allmerica Investments, Inc. ("Allmerica
Investments"), a broker-dealer affiliate of the Company.
5
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SPECIAL TERMS
As used in this Prospectus, the following terms have the indicated meanings:
ACCUMULATED VALUE: the value of an IRA Account on any Valuation Date prior to
the Annuity Date, equal to the sum of the value of all Accumulation Units in the
Sub-Accounts of the Separate Account and of the value of all accumulations in
the General Account of the Company then credited to the IRA Account.
ACCUMULATION UNIT: a measure of the Participant-Owner's interest in a
Sub-Account of the Separate Account prior to the Annuity Date.
ANNUITY DATE: the date on which annuity payments are to start.
FUNDS: the following investment portfolios of Allmerica Investment Trust: the
Select International Equity Fund, Select Aggressive Growth Fund, Growth Fund,
Equity Index Fund, Investment Grade Income Fund, Government Bond Fund and Money
Market Fund.
GENERAL ACCOUNT: all the assets of the Company other than those held in a
separate investment account.
PARTICIPANT-OWNER: an employee or former employee of the Policyholder who makes
contributions under the Contract in accordance with its provisions.
SEPARATE ACCOUNT: Separate Account I of the Company. Separate Account I
consists of assets segregated from other assets of the Company. The investment
performance of the assets of the Separate Account is determined separately from
the other assets of the Company. The assets of the Separate Account are not
chargeable with liabilities arising out of any other business which the Company
may conduct.
SUB-ACCOUNT: respecting the Separate Account, a subdivision offered under this
Prospectus which invests exclusively in the shares of a Fund of Allmerica
Investment Trust; respecting the General Account, an account, with a fixed
interest rate guaranteed until a specified maturity date, maintained within the
General Account for crediting interest to Participant-Owner contributions
allocable to the General Account.
SURRENDER VALUE: the Accumulated Value of an IRA Account minus any IRA Account
Fee and withdrawal charge applicable upon surrender.
VALUATION DATE: a day on which the Accumulated Values of all IRA Accounts are
determined. Valuation dates currently occur on each day on which the New York
Stock Exchange is open for trading, and on such other days (other than a day
during which no payment, partial withdrawal, or surrender of a Contract or
Certificate was received) when there is a sufficient degree of trading in a
Fund's portfolio securities such that the current net asset value of the
Sub-Accounts of the Separate Account may be materially affected.
VALUATION PERIOD: the interval between two consecutive Valuation Dates.
YOU OR YOUR: refers to the Participant-Owner under the Contract.
6
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ANNUAL AND TRANSACTION EXPENSES
The purpose of the following tables is to assist the Participant-Owner in
understanding the various costs and expenses that a Participant-Owner will bear
directly or indirectly under the Contract. The tables reflect charges under the
Contract, expenses of the Sub-Accounts of the Separate Account, and expenses of
the Funds. In addition to the charges and expenses described below, in some
states premium taxes may be applicable.
SURRENDER AND REDEMPTION CHARGE: None on value in Sub-Accounts of the Separate
Account. (A charge may be made on surrender or partial redemption of the IRA
Account, equal to 4% of the amount withdrawn from a Sub-Account of the General
Account on other than its maturity date.)
<TABLE>
<S> <C>
TRANSFER CHARGE: None.
ANNUAL IRA ACCOUNT FEE: An annual IRA Account Fee of $25
is deducted prior to the Annuity Date.
SEPARATE ACCOUNT ANNUAL EXPENSES
(as a percentage of average account value)
MORTALITY AND EXPENSE RISK CHARGE: 0.90%
ADMINISTRATIVE EXPENSE CHARGE: 0.25%
-----
TOTAL ANNUAL EXPENSES: 1.15%
</TABLE>
In addition to the charges described above, certain fees and expenses are
deducted from the assets of the Funds. For more information concerning fees and
expenses, see the prospectus of the Funds.
1996 ANNUAL FUND EXPENSES
<TABLE>
<CAPTION>
OTHER FUND
EXPENSES (AFTER
MANAGEMENT ANY APPLICABLE TOTAL FUND
FUND FEE REIMBURSEMENTS) EXPENSES
- ------------------------------------------------ ------------- ----------------- -----------
<S> <C> <C> <C>
Select International Equity Fund 1.00% 0.23*% 1.23%#
Select Aggressive Growth Fund 1.00% 0.08%* 1.08%
Growth Fund 0.44% 0.07%* 0.51%
Equity Index Fund 0.32% 0.14%* 0.46%
Investment Grade Income Fund 0.40% 0.12%* 0.52%
Government Bond Fund 0.50% 0.16%* 0.66%
Money Market Fund 0.28% 0.06%* 0.34%
</TABLE>
* Under the Management Agreement with Allmerica Investment Trust, Allmerica
Investment Management Company, Inc. ("Manager") has declared a voluntary expense
limitation of 1.50% of average net assets for the Select International Equity
Fund, 1.35% for the Select Aggressive Growth Fund, 1.20% for the Growth Fund,
1.00% for the Investment Grade Income Fund and Government Bond Fund, and 0.60%
for the Money Market Fund and Equity Index Fund. The total operating expenses of
the Funds of the Trust were less than their respective expense limitations
throughout 1996. The declaration of a voluntary expense limitation in any year
does not bind the Manager to declare future expense limitations with respect to
these funds.
# The Select International Equity Fund has entered into an agreement with
brokers whereby the brokers rebate a portion of Commissions. Had these amounts
been treated as a reduction of expenses the total operating expenses would have
been 1.20% for the Select International Equity Fund.
7
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The following Examples demonstrate the cumulative expenses which would be paid
by You at 1-year, 3-year, 5-year and 10-year intervals, assuming a $1,000
investment in a Sub-Account of the Separate Account and a 5% annual return on
assets. Because the expenses of the Funds differ, separate Examples are used to
illustrate the expenses incurred by You on an investment in the various
Sub-Accounts of the Separate Account. No withdrawal charge is illustrated in the
Examples because there is no withdrawal charge applied to investments in a
Sub-Account of the Separate Account. Whether or not You surrender or annuitize
at the end of the applicable period, the illustrated expenses would be the same.
THE INFORMATION GIVEN UNDER THE FOLLOWING EXAMPLES SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR
LESSER THAN THOSE SHOWN.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Underlying Fund 1 Year 3 Years 5 Years 10 Years
<CAPTION>
<S> <C> <C> <C> <C>
Growth Fund $ 20 $ 62 $ 106 $ 228
Investment Grade Income Fund $ 20 $ 61 $ 105 $ 227
Money Market Fund $ 19 $ 56 $ 96 $ 209
Equity Index Fund $ 20 $ 62 $ 106 $ 229
Government Bond Fund $ 21 $ 66 $ 113 $ 243
Select Aggressive Growth Fund $ 25 $ 78 $ 133 $ 284
Select International Equity Fund $ 27 $ 83 $ 141 $ 298
</TABLE>
As required in rules promulgated under the 1940 Act, the IRA Account Fee has
been reflected in the Examples by a method intended to show the "average" impact
of the IRA Account Fee on an investment in the Separate Account. The total IRA
Account Fees collected under the Contracts by the Company are divided by the
total average net assets attributable to the Contracts. The resulting percentage
is .30%, and the amount of the IRA Account Fees is assumed to be $3.00 in the
Examples. After annuitization, the IRA Account Fee is not deducted.
8
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CONDENSED FINANCIAL INFORMATION
First Allmerica Financial Life Insurance Company
Separate Account I
<TABLE>
<CAPTION>
SUB-ACCOUNT 1996 1995 1994 1993
- ---------------------------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
GROWTH
(SUB-ACCOUNT 1)
Unit Value:
Beginning of Period 139.674 106.389 107.455 100.000*
End of Period 165.955 139.674 106.389 107.455
Number of Units Outstanding at End of Period (in thousands) 7 5 4 3
INVESTMENT GRADE INCOME
(SUB-ACCOUNT 2)
Unit Value:
Beginning of Period 116.633 100.109 104.357 100.00*
End of Period 119.395 116.633 100.109 104.357
Number of Units Outstanding at End of Period (in thousands) 2 1 1 1
MONEY MARKET
(SUB-ACCOUNT 3)
Unit Value:
Beginning of Period 108.898 104.088 101.316 100.000*
End of Period 113.415 108.898 104.088 101.316
Number of Units Outstanding at End of Period (in thousands) 6 3 4 1
EQUITY INDEX
(SUB-ACCOUNT 4)
Unit Value:
Beginning of Period 143.302 106.437 106.555 100.000*
End of Period 173.261 143.302 106.437 106.555
Number of Units Outstanding at End of Period (in thousands) 2 1 1 1
GOVERNMENT BOND
(SUB-ACCOUNT 5)
Unit Value:
Beginning of Period 111.493 99.753 101.808 100.000*
End of Period 114.085 111.493 99.753 101.808
Number of Units Outstanding at End of Period (in thousands) 2 2 1 3
</TABLE>
* The inception date of the Sub-Accounts is as follows: April 6, 1993 for
Investment Grade Income and Money Market (Sub-Accounts 2 and 3); May 14, 1993
for Growth and Equity Index (Sub-Accounts 1 and 4); May 17, 1993 for Government
Bond (Sub-Account 5). No information is given for the Sub-Accounts investing in
the Select Aggressive Growth Fund and Select International Equity Fund because
these Sub-Accounts did not begin operations until after December 31, 1996.
9
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PERFORMANCE INFORMATION
The Contracts were first offered to the public in 1993. However, the Company may
advertise "Total Return" and "Average Annual Total Return" performance
information of the Sub-Accounts and "yield" and "effective yield" of the Money
Market Sub-Account based on the periods that the Funds have been in existence.
The results for any period prior to the Contracts being offered will be
calculated as if the Contracts had been offered during that period of time, with
all charges assumed to be those applicable to the Sub-Accounts, the Funds, and
(in Table 1) assuming that the Contract is surrendered at the end of the
applicable period.
The "total return" of a Sub-Account refers to the total of the income generated
by an investment in the Sub-Account and of the changes in the value of the
principal (due to realized and unrealized capital gains or losses) for a
specified period, reduced by certain charges, and expressed as a percentage of
the investment.
The "yield" of the Money Market Sub-Account refers to the income generated by an
investment in the Sub-Account over a seven-day period (which period will be
specified in the advertisement). This income is then "annualized" by assuming
that the income generated in the specific week is generated over a 52-week
period. This annualized yield is shown as a percentage of the investment. The
"effective yield" calculation is similar, but when annualized, the income earned
by an investment in the Sub-Account is assumed to be reinvested. Thus the
"effective yield" will be slightly higher than the "yield" because of the
compounding effect of this assumed reinvestment.
The total return, yield, and effective yield figures are adjusted to reflect the
Sub-Account's asset charges. The total return figures also reflect the $25
annual IRA Account Fee.
Performance information for a Sub-Account may be compared, in reports and
promotional literature, to: (i) the Standard & Poor's 500 Stock Index ("S & P
500"), Dow Jones Industrial Average ("DJIA"), Shearson Lehman Aggregate Bond
Index or other unmanaged indices so that investors may compare the Sub-Account
results with those of a group of unmanaged securities widely regarded by
investors as representative of the securities markets in general; (ii) other
groups of variable annuity separate accounts or other investment products
tracked by Lipper Analytical Services, a widely used independent research firm
which ranks mutual funds and other investment products by overall performance,
investment objectives, and assets, or tracked by other services, companies,
publications, or persons, such as Morning Star, Inc. who rank such investment
products on overall performance or other criteria; or (iii) the Consumer Price
Index (a measure for inflation) to assess the real rate of return from an
investment in the Sub-Account. Unmanaged indices may assume the reinvestment of
dividends but generally do not reflect deductions for administrative and
management costs and expenses.
PERFORMANCE INFORMATION FOR ANY SUB-ACCOUNT REFLECTS ONLY THE PERFORMANCE OF A
HYPOTHETICAL INVESTMENT IN THE SUB-ACCOUNT DURING THE PARTICULAR TIME PERIOD ON
WHICH THE CALCULATIONS ARE BASED. PERFORMANCE INFORMATION SHOULD BE CONSIDERED
IN LIGHT OF THE INVESTMENT OBJECTIVES AND POLICIES, CHARACTERISTICS AND QUALITY
OF THE PORTFOLIO OF THE FUND IN WHICH THE SUB-ACCOUNT INVESTS AND THE MARKET
CONDITIONS DURING THE GIVEN TIME PERIOD, AND SHOULD NOT BE CONSIDERED AS A
REPRESENTATION OF WHAT MAY BE ACHIEVED IN THE FUTURE.
10
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AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1996
<TABLE>
<CAPTION>
<S> <C> <C> <C>
One-Year 10 Years
Total 5 or since
Name of Fund Return Years Inception*
<CAPTION>
<S> <C> <C> <C>
Select International Equity Fund 20.53% n/a 12.37%
Select Aggressive Growth Fund 17.18% n/a 18.39%
Growth Fund 18.82% 11.50% 14.44%
Equity Index Fund 20.91% 13.29% 16.40%
Investment Grade Income Fund 2.37% 6.05% 7.75%
Government Bond Fund 2.32% 4.64% 5.68%
Money Market Fund 4.15% 3.18% 4.68%
</TABLE>
* If less than 10 years. The inception dates for the Funds are: 4/29/85 for
Growth, Investment Grade Income and Money Market; 9/28/90 for Equity Index;
8/26/91 for Government Bond; 8/21/92 for Select Aggressive Growth; 5/01/94 for
Select International Equity.
WHAT IS AN INDIVIDUAL RETIREMENT ANNUITY?
Each IRA Account established under the Contract is intended to be an individual
retirement annuity qualified under Section 408(b) of the Code. See "Individual
Retirement Annuities." An IRA Account may be established by a Participant-Owner
with a rollover distribution from a qualified retirement plan maintained by the
Policyholder which is eligible for rollover treatment as described in Section
402(a)(5), 402(a)(6) or 403(a)(4) of the Code. Such Participant-Owner may also
establish an additional IRA Account for his or her spouse. Separate IRA Accounts
will be maintained under the Contract for rollover contributions and annual
deductible and non-deductible contributions, unless a Participant-Owner requests
otherwise in writing. A separate Certificate will be issued for each IRA Account
maintained for the Participant-Owner.
In general, an annuity is designed to provide a retirement income in the form of
monthly payments for the lifetime of the purchaser or an individual chosen by
the purchaser. The retirement income payments are called "annuity payments."
Under an annuity, the insurance company assumes a mortality risk and an expense
risk. The mortality risk arises from the insurance company's guarantee that
annuity payments will continue for the life of the payee, regardless of how long
the payee lives or how long all payees as a group live. The expense risk arises
from the insurance company's guarantee that charges will not be increased beyond
the limits specified in the contract, regardless of actual costs of operations.
Your contributions, less any applicable deductions, are invested by the
insurance company. After retirement, annuity payments are paid to the payee for
life or for such other period chosen by You. Annuity payments under the
Contracts are fixed and guaranteed by the insurance company, which assumes the
risk of making the investments to enable it to make the guaranteed payments. For
more information about fixed annuities, see APPENDIX A, "MORE INFORMATION ABOUT
THE GENERAL ACCOUNT."
During variable accumulation, values are not guaranteed but will vary depending
on the investment performance of a portfolio of securities. Any investment gains
or losses are reflected in accumulated value. If the portfolio increases in
value, the accumulated value increases. If the portfolio decreases in value, the
accumulated value decreases.
RIGHT TO REVOKE INDIVIDUAL RETIREMENT ANNUITY
You may revoke your IRA Account at any time between the date of the application
for the IRA Account and the date 10 days after receipt of the Certificate.
Within seven days the Company will refund the greater of (1) the entire
contribution, or (2) the Accumulated Value plus any amounts deducted from the
IRA Account or by the Trust for taxes, charges or fees. In order to revoke the
IRA Account, You must mail or deliver the
11
<PAGE>
Certificate (if it has already been received), to the Home Office of the Company
at 440 Lincoln Street, Worcester, Massachusetts 01653, or to any local agency of
the Company. Mailing or delivery must occur on or before 10 days after receipt
of the Certificate for revocation to be effective.
The liability of the Separate Account under this provision is limited to your
Accumulated Value in the Separate Account on the date of cancellation. Any
additional amounts refunded to the Participant-Owner will be paid by the
Company.
DESCRIPTION OF THE COMPANY, THE SEPARATE ACCOUNT AND THE TRUST
THE COMPANY
The Company organized under the laws of Massachusetts in 1844, is the fifth
oldest life insurance company in America. Effective October 16, 1995, the
Company converted from a mutual life insurance company known as State Mutual
Life Assurance Company of America to a stock life insurance company and adopted
its present name. The Company is a wholly-owned subsidiary of Allmerica
Financial Corporation ("AFC"). The Company's principal office is located at 440
Lincoln Street, Worcester, Massachusetts 01653, telephone 508-855-1000
("Principal Office").
The Company is subject to the laws of the Commonwealth of Massachusetts
governing insurance companies and to regulation by the Commissioner of Insurance
of Massachusetts. In addition, the Company is subject to the insurance laws and
regulations of other states and jurisdictions in which it is licensed to
operate.
THE SEPARATE ACCOUNT
Separate Account I ("Separate Account") is a separate investment account of the
Company. The Separate Account currently consists of eleven Sub-Accounts. The
assets used to fund the variable portions of the Contracts are set aside in the
Sub-Accounts of the Separate Account and are kept separate and apart from the
general assets of the Company. Each Sub-Account is administered and accounted
for as part of the general business of the Company, but the income, capital
gains, or capital losses of each Sub-Account are allocated to such Sub-Account,
without regard to other income, capital gains, or capital losses of the Company.
Under Massachusetts law, as provided in the Contracts the assets of the Separate
Account cannot be charged with any liabilities arising out of any other business
of the Company.
The Separate Account was authorized by vote of the Board of Directors of the
Company on August 20, 1991. The Separate Account meets the definition of
"separate account" under federal securities laws and is registered with the
Securities and Exchange Commission ("Commission") as a unit investment trust
under the Investment Company Act of 1940 (the "1940 Act"). Such registration
does not involve the supervision of management or investment practices or
policies of the Separate Account or the Company by the Commission. The Company
reserves the right, subject to compliance with applicable law, to change the
names of the Separate Account and the Sub-Accounts.
ALLMERICA INVESTMENT TRUST
Allmerica Investment Trust ("Trust") is an open-end, diversified, management
investment company registered with the SEC under the 1940 Act. Such registration
does not involve supervision by the Commission of the investments or investment
policy of the Trust or its separate investment funds.
The Trust was established as a Massachusetts business trust on October 11, 1984,
for the purpose of providing a vehicle for the investment of assets of various
separate accounts established by the Company or other affiliated insurance
companies. Currently, the Trust has nineteen investment portfolios, each issuing
a series of shares. Seven investment portfolios of the Trust are offered under
this Prospectus.
Allmerica Investment Management Company, Inc. ("Manager") serves as investment
adviser of the Trust. The Manager has entered into sub-adviser agreements with
other investment managers ("Sub-Advisers"), who manage the investments of the
Funds. See "INVESTMENT ADVISORY SERVICES TO THE TRUST."
12
<PAGE>
The assets of each Fund are held separate from the assets of the other Funds.
Each Fund operates as a separate investment vehicle and the income or losses of
one Fund have no effect on the investment performance of another Fund. Shares of
the Trust are not offered to the general public but solely to such separate
accounts.
INVESTMENT OBJECTIVES AND POLICIES
A summary of investment objectives of each of the Funds is set forth below. The
Funds are listed by general investment risk characteristics. MORE DETAILED
INFORMATION REGARDING THE INVESTMENT OBJECTIVES, RESTRICTIONS AND RISKS,
EXPENSES PAID BY THE FUNDS AND OTHER RELEVANT INFORMATION REGARDING THE
UNDERLYING INVESTMENT COMPANIES MAY BE FOUND IN THE PROSPECTUS OF THE TRUST,
WHICH ACCOMPANIES THIS PROSPECTUS AND SHOULD BE READ CAREFULLY BEFORE INVESTING.
The Statement of Additional Information of the Trust is available upon request.
There can be no assurance that the investment objectives of the Funds can be
achieved.
SELECT INTERNATIONAL EQUITY FUND -- The Select International Equity Fund of the
Trust seeks maximum long-term total return (capital appreciation and income)
primarily by investing in common stocks of established non-U.S. companies.
SELECT AGGRESSIVE GROWTH FUND -- The Select Aggressive Growth Fund of the Trust
seeks above-average capital appreciation by investing primarily in common stocks
of companies which are believed to have significant potential for capital
appreciation.
GROWTH FUND -- The Growth Fund of the Trust is invested in common stocks and
securities convertible into common stocks that are believed to represent
significant underlying value in relation to current market prices. The objective
of the Growth Fund is to achieve long-term growth of capital. Realization of
current investment income, if any, is incidental to this objective.
EQUITY INDEX FUND -- The Equity Index Fund of the Trust seeks to provide
investment results that correspond to the aggregate price and yield performance
of a representative selection of United States publicly traded common stocks.
The Equity Index Fund seeks to achieve its objective by attempting to replicate
the aggregate price and yield performance of the Standard & Poor's Composite
Index of 500 Stocks.
INVESTMENT GRADE INCOME FUND -- The Investment Grade Income Fund of the Trust is
invested in a diversified portfolio of fixed income securities with the
objective of seeking as high a level of total return (including both income and
capital appreciation) as is consistent with prudent investment management.
GOVERNMENT BOND FUND -- The Government Bond Fund of the Trust has the investment
objectives of seeking high income, preservation of capital and maintenance of
liquidity, primarily through investments in debt instruments issued or
guaranteed by the U.S. Government or its agencies or instrumentalities, and in
related options, futures and repurchase agreements.
MONEY MARKET FUND -- The Money Market Fund of the Trust is invested in a
diversified portfolio of high-quality, short-term money market instruments with
the objective of obtaining maximum current income consistent with the
preservation of capital and liquidity.
IN SOME STATES, INSURANCE REGULATIONS MAY RESTRICT THE AVAILABILITY OF
PARTICULAR SUB-ACCOUNTS.
In the event of a material change in the investment policy of a Sub-Account or
the Fund in which it invests, the Participant-Owner will be notified of the
change. If a Participant-Owner has Accumulated Value in that Sub-Account, the
Company will transfer it without charge on written request by the
Participant-Owner to another Sub-Account of the Separate Account or to a
Sub-Account of the General Account, if available. The Company must receive the
written request within sixty (60) days of the later of (1) the effective date of
such change in the investment policy or (2) the receipt of the notice of the
Participant-Owner's right to transfer.
13
<PAGE>
INVESTMENT ADVISORY SERVICES
INVESTMENT ADVISORY SERVICES TO THE TRUST
The overall responsibility for the supervision of the affairs of the Trust vests
in the Trustees. The Trustees have entered into a Management Agreement with
Allmerica Investment Management Company, Inc. ("Manager"), an indirect
wholly-owned subsidiary of the Company, to handle the day-to-day affairs of the
Trust. The Manager, subject to review by the Trustees, is responsible for the
actual management of the Funds. The Manager is also obligated to perform certain
administrative and management services for the Trust, furnishes to the Trust all
necessary office space, facilities, and equipment, and pays the compensation, if
any, of officers and Trustees who are affiliated with the Manager.
Other than the expenses specifically assumed by the Manager under the Management
Agreement, all expenses incurred in the operation of the Trust are borne by it,
including fees and expenses associated with the registration and qualification
of the Trust's shares under the Securities Act of 1933 (the "1933 Act"), other
fees payable to the Commission, independent public accountant, legal and
custodian fees, association membership dues, taxes, interest, insurance
premiums, brokerage commission, fees and expenses of the Trustees who are not
affiliated with the Manager, expenses for proxies, prospectuses, and reports to
shareholders, and other expenses.
For providing its services under the Management Agreement, the Manager receives
a fee, computed daily at an annual rate based on the average daily net asset
value of each Underlying Fund as follows:
<TABLE>
<S> <C> <C>
Select International Equity * 1.00%
Fund
Select Aggressive Growth Fund * 1.00%
Growth Fund First $50 million 0.60%
$50 - 250 million 0.50%
Over $250 million 0.35%
Equity Index Fund First $50 million 0.35%
$50 - 250 million 0.30%
Over $250 million 0.25%
Investment Grade Income Fund First $50 million 0.50%
$50 - 250 million 0.35%
Over $250 million 0.25%
Government Bond Fund * 0.50%
Money Market Fund First $50 million 0.35%
$50 - 250 million 0.25%
Over $250 million 0.20%
</TABLE>
* For the Government Bond Fund, Select International Equity Fund, Select
Aggressive Growth Fund, each rate applicable to Allmerica Investment does not
vary according to the level of assets in the Fund.
Allmerica Investment's fee will be paid from the assets of each Fund. Pursuant
to the Management Agreement with the Trust, Allmerica Investment has entered
into agreements ("Sub-Adviser Agreements") with other investment advisers
("Sub-Advisers") under which each Sub-Adviser manages the investments of one or
more of the Funds. Under the Sub-Adviser Agreement, the Sub-Adviser is
authorized to engage in portfolio transactions on behalf of the applicable Fund,
subject to such general or specific instructions as may be given by the
Trustees. The terms of a Sub-Adviser Agreement cannot be materially changed
without the approval of a majority in interest of the shareholders of the
affected Fund. Allmerica Investment is solely
14
<PAGE>
responsible for the payment of all fees for investment management services to
the Sub-Advisers. The Sub-Advisers and the fees they receive from Allmerica
Investment ( computed daily at an annual rate based on the average daily net
asset value of each Fund), are as follows:
<TABLE>
<CAPTION>
Sub-Adviser Fund Net Asset Value Rate
- -------------------------------- ------------------------------ ----------------- ---------
<S> <C> <C> <C>
Bank of Ireland Asset Management Select International Equity First $50 million 0.45%
(U.S.) Limited Fund Next $50 million 0.40%
Over $100 million 0.30%
Nicholas-Applegate Capital Select Aggressive Growth Fund ** 0.60%
Management, L.P.
Miller, Anderson & Sherrerd, LLP Growth Fund * *
Allmerica Asset Management, Inc. Equity Index Fund ** 0.10%
Allmerica Asset Management, Inc. Investment Grade Income Fund ** 0.20%
Allmerica Asset Management, Inc. Government Bond Fund ** 0.20%
Allmerica Asset Management, Inc. Money Market Fund ** 0.10%
</TABLE>
* Allmerica Investment will pay a fee to Miller, Anderson & Sherrerd LLP based
on the aggregate assets of the Growth Fund and certain other accounts of First
Allmerica and its affiliates (collectively, the "Affiliated Accounts") which are
managed by Miller, Anderson & Sherrerd LLP, under the following schedule:
<TABLE>
<CAPTION>
Aggregate Average Net
Assets Rate
- --------------------------- ---------
<S> <C>
First $50 million 0.500%
$50 - 100 million 0.375%
$100 - 500 million 0.250%
$500 - 850 million 0.200%
Over $850 million 0.150%
</TABLE>
** For the Investment Grade Income Fund, Money Market Fund, Equity Index Fund,
Government Bond Fund, and Select Aggressive Growth Fund, each rate applicable to
the Sub-Advisers does not vary according to the level of assets in the Fund.
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS
The Company reserves the right, subject to applicable law, to make additions to,
deletions from, or substitutions for the shares that are held in the
Sub-Accounts of the Separate Account or that the Sub-Accounts may purchase. If
the shares of any Fund are no longer available for investment or if in the
Company's judgment further investment in any Fund should become inappropriate in
view of the purposes of the Separate Account or the affected Sub-Account, the
Company may redeem the shares of that Fund and substitute shares of another
registered open-end management company. The Company will not substitute any
shares attributable to an IRA Account interest in a Sub-Account without notice
to You and prior approval of the SEC and state insurance authorities, to the
extent required by the 1940 Act or other applicable law. The Separate Account
may, to the extent permitted by law, purchase other securities for other
contracts or certificates or permit a conversion between certificates upon
request by a Participant-Owner.
The Company also reserves the right to establish additional Sub-Accounts of the
Separate Account, each of which would invest in shares corresponding to a new
Fund or in shares of another investment company having a specified investment
objective. Subject to applicable law and any required SEC approval, the Company
may, in its sole discretion, establish new Sub-Accounts or eliminate one or more
Sub-Accounts if marketing needs, tax considerations or investment conditions
warrant. Any new Sub-Accounts may be made available to existing
Participant-Owners on a basis to be determined by the Company.
15
<PAGE>
Shares of the Funds are also issued to separate accounts of the Company and its
affiliates which issue variable life policies ("mixed funding") and other
variable annuities. It is conceivable that in the future such mixed funding may
be disadvantageous for variable life Policyowners or variable annuity contract
owners. Although we do not currently foresee any such disadvantage to either
variable life insurance or variable annuity policy owners/participant-owners,
the Company and the Boards of the funds intend to monitor events in order to
identify any material conflicts and to determine what action, if any should be
taken in response thereto. If the Trustees of the Trust were to conclude that
separate funds should be established for variable life and variable annuity
separate accounts, the Company will bear the expenses.
If any of these substitutions or changes are made, the Company may by
appropriate endorsement change the Contract and Certificate thereunder to
reflect the substitution or change and will notify You of all such changes. If
the Company deems it to be in the best interest of Participant-Owners, and
subject to any approvals that may be required under applicable law, the Separate
Account or any of its Sub-Accounts may be operated as a management company under
the 1940 Act, may be deregistered under the 1940 Act if registration is no
longer required, or may be combined with other Sub-Accounts or other separate
accounts of the Company.
VOTING RIGHTS
The Company will vote Fund shares held by each Sub-Account in accordance with
instructions received from Participant-Owners, who will be provided with proxy
materials of the Fund together with a form with which to give voting
instructions to the Company. Shares for which no timely instructions are
received will be voted in proportion to the instructions which are received. The
Company will also vote shares in a Sub-Account that it owns and which are not
attributable to Contracts in the same proportion. If the 1940 Act or any rules
thereunder should be amended or if the present interpretation of the 1940 Act or
such rules should change, and as a result the Company determines that it is
permitted to vote shares in its own right, whether or not such shares are
attributable to the Policies, the Company reserves the right to do so.
The number of votes which You may cast will be determined by the Company as of
the record date established by the Fund. The number of Fund shares attributable
to You will be determined by dividing the dollar value of the Accumulation Units
of the Sub-Account credited under the Contract by the net asset value of one
Fund share.
CHARGES AND DEDUCTIONS
Deductions under the Contracts and charges against the assets of the
Sub-Accounts of the Separate Account are described below. Other deductions and
expenses paid out of the assets of the Funds are described in the Prospectus and
Statements of Additional Information of the Trust.
SURRENDER AND REDEMPTION CHARGE
No charge for sales expenses is deducted from contributions at the time the
contributions are made. However, a withdrawal charge of 4% will be made on any
amount withdrawn from a Sub-Account of the General Account on other than its
maturity date, and upon election of an annuity for a specified number of years,
subject to certain exceptions described below. No sales charge is deducted upon
withdrawals from any Sub-Accounts of the Separate Account.
LED DISTRIBUTIONS. You may elect to make a series of systematic withdrawals
from your IRA Account according to a life expectancy distribution ("LED"), by
returning a properly signed LED request form to the Company's Home Office. The
LED permits You to make systematic withdrawals from the IRA Account over your
lifetime. The amount withdrawn from the IRA Account changes each year because
life expectancy changes each year that a person lives. For example, actuarial
tables indicate that a person age 70 has a life expectancy of 16 years, but a
person who attains age 86 has a life expectancy of 6.5 years.
If You elect the LED, in each calendar year a fraction of the Accumulated Value
is withdrawn from the IRA Account based on your then life expectancy. The
numerator of the fraction is 1 (one) and the denominator of
16
<PAGE>
the fraction is your the remaining life expectancy, as determined annually by
the Company. The resulting fraction, expressed as a percentage, is applied to
the Accumulated Value of the IRA Account at the beginning of the year to
determine the amount to be distributed during the year. You may elect monthly,
bimonthly, quarterly, semiannual or annual distributions and may terminate the
LED at any time. You may also elect to receive distributions under a LED which
is determined on the joint life expectancy of You and a beneficiary. The Company
may also offer other systematic withdrawals.
The Company will impose no withdrawal charge respecting any amount received in a
calendar year as part of a series of LED distributions that:
- - does not exceed the minimum amount required to be distributed to satisfy the
requirements of Section 401(a)(9) of the Code;
- - is withdrawn from a Sub-Account of the Separate Account;
- - is withdrawn from a Sub-Account of the General Account on its maturity date;
or
- - is withdrawn from one or more Sub-Accounts of the General Account, but does
not exceed 20% of the portion of the Accumulated Value allocated to the
General Account on the preceding December 31.
If You make withdrawals under the LED distribution prior to age 59 1/2, the
withdrawals may be treated by the Internal Revenue Service ("IRS") as premature
distributions from the IRA Account. The payments would then be taxed on an
"income first" basis and be subject to a 10% federal tax penalty. For more
information, see "FEDERAL TAX CONSIDERATIONS," "Taxation of the Contracts in
General."
SURRENDERS. In a complete surrender, the amount You receive is equal to the
entire Accumulated Value of his or her IRA Account, net of any applicable
withdrawal charge, IRA Account Fee and tax withholding. For further information
on surrender and partial redemption, including minimum limits on amount redeemed
and amount remaining in the IRA Account for partial redemptions, see "Surrender"
and "Partial Redemption" under "THE VARIABLE ANNUITY CONTRACTS" and see "FEDERAL
TAX CONSIDERATIONS."
CHARGE AT THE TIME ANNUITY PAYMENTS BEGIN. If a period certain option is chosen
(Option V), a withdrawal charge will be deducted from the Accumulated Value of
the IRA Account. Such charge is the same as that which would apply had the IRA
Account been surrendered on the Annuity Date.
No withdrawal charge is imposed at the time of annuitization in any Certificate
year under an option involving a life contingency (Options I, II, III, IV-A or
IV-B).
SALES EXPENSE. Currently, no commissions on the Contracts or Certificates
thereunder are paid by the Company. Sales expenses do not result in any
additional charge to You or to the Separate Account. The Company intends to
recoup sales expenses through a combination of anticipated withdrawal charges,
described above, and profits from the General Account. Any withdrawal charges
assessed under a Contract will be retained by the Company except for amounts it
may pay to Allmerica Investments for services it performs and expenses it may
incur as principal underwriter and general distributor.
PREMIUM TAXES
Some states and municipalities impose a premium tax on variable annuity
contracts. State premium taxes currently range up to 3.5%.
The Company makes a charge for state and municipal premium taxes, where
applicable. In accordance with the laws of the state involved, the premium tax
charge usually is deducted in one of two ways:
(1) the premium tax charge is deducted at the time the contribution is received
(and the contributions allocated to the General Account or Sub-Accounts of
the Separate Account will be net of such charge); or
(2) the premium tax charge is deducted at the time annuity payments begin.
17
<PAGE>
Where permitted by state law, it is the Company's policy to follow the practice
in (2) above. However, if no amount for premium tax was deducted at the time the
contribution was received, but subsequently tax is determined to be due prior to
the Annuity Date, the Company reserves the right to deduct the premium tax from
the Accumulation Value of the IRA Account at the time such determination is
made.
IRA ACCOUNT FEE
Prior to the Annuity Date, an IRA Account Fee is deducted annually on the last
Valuation Date of the month of the anniversary of the establishment of the IRA
Account ("Anniversary Deduction") and upon full surrender of the IRA Account.
The IRA Account Fee is $25. For IRA Accounts established after April 30, 1993,
the IRA Account Fee will be waived in the following circumstances: if the
contribution establishing the IRA Account was at least $15,000, the IRA Account
Fee will be waived on the first Anniversary Deduction; if the Accumulated Value
of the IRA Account was at least $15,000 as of December 31 of the calendar year
previous to any subsequent Anniversary Deduction, the IRA Account Fee will be
waived on such subsequent Anniversary Deduction.
Where Accumulation Value has been allocated to more than one General Account or
Sub-Account of the Separate Account, a percentage of the total IRA Account Fee
will be deducted from the Accumulation Value in each Sub-Account. The portion of
the charge deducted from each Sub-Account will be equal to the percentage which
the Accumulation Value in that Sub-Account represents of the total Accumulated
Value of the IRA Account. The deduction of the IRA Account Fee will result in
cancellation of a number of Accumulation Units equal in value to the percentage
of the charge deducted from any Sub-Account of the Separate Account. No
deduction from a Sub-Account of the General Account will be permitted to reduce
credited interest to a rate lower than the minimum guaranteed interest rates
stated in Appendix A, "MORE INFORMATION ABOUT THE GENERAL ACCOUNT."
ANNUAL CHARGES AGAINST SEPARATE ACCOUNT ASSETS
The following annual charges are deducted against the assets of the Separate
Account:
MORTALITY AND EXPENSE RISK CHARGE. The Company makes a charge of 0.90% on an
annual basis of the daily value of each Sub-Account's assets to cover the
mortality and expense risk which the Company assumes in relation to the variable
portion of the Contracts. The charge is imposed only during the accumulation
period. The mortality risk arises from the Company's guarantee that it will make
annuity payments in accordance with annuity rate provisions established at the
time the Certificate is issued for the life of the payee (or in accordance with
the annuity option selected), no matter how long the payee lives and no matter
how long all payees as a class live. The expense risk arises from the Company's
guarantee that the charges it makes will not exceed the limits described in the
Contracts and in this Prospectus.
If the charge for mortality and expense risks is not sufficient to cover actual
mortality experience and expenses, the Company will absorb the losses. If
expenses are less than the amounts provided to the Company by the charge, the
difference will be a profit to the Company. To the extent this charge results in
a profit to the Company, such profit will be available for use by the Company
for, among other things, the payment of distribution, sales and other expenses.
Since mortality and expense risks involve future contingencies which are not
subject to precise determination in advance, it is not feasible to identify
specifically the portion of the charge which is applicable to each. The Company
estimates that a reasonable allocation might be .25% for mortality risk and .65%
for expense risk.
ADMINISTRATIVE EXPENSE CHARGE. The Company assesses each Sub-Account of the
Separate Account with a daily charge at an annual rate of 0.25% of the average
daily net assets of the Sub-Account. The charge is imposed only during the
accumulation period. The daily Administrative Expense Charge is assessed to help
defray administrative expenses actually incurred in the administration of the
Sub-Account of the Separate
18
<PAGE>
Account, without profits. However, there is no direct relationship between the
amount of administrative expenses imposed under a given Certificate and the
amount of expenses actually attributable to that Certificate.
Deductions for the IRA Account Fee (described under "IRA Account Fee") and for
the Administrative Expense Charge are designed to reimburse the Company for the
cost of administration and related expenses and are not expected to be a source
of profit. The administrative functions and expense assumed by the Company in
connection with the Separate Account and the IRA Accounts include, but are not
limited to, clerical, accounting, actuarial and legal services, rent, postage,
telephone, office equipment and supplies, expenses of preparing and printing
registration statements, expense of preparing and typesetting prospectuses and
the cost of printing prospectuses not allocable to sales expense, filing and
other fees.
OTHER CHARGES
Because the Sub-Accounts of the Separate Account purchase shares of the Funds,
the value of the net assets of the Sub-Accounts will reflect the investment
advisory fee and other expenses incurred by the Funds. The Prospectus and
Statements of Additional Information of the Trust contain additional information
concerning expenses of the Funds.
DESCRIPTION OF THE CONTRACT
The Contract is designed for use in connection with individual retirement
annuities. You and your beneficiaries are cautioned that the rights of any
person to any benefits under the Contract may be subject to the terms and
conditions of Section 408 of the Code, regardless of the terms and conditions of
the Contract. Distributions under the Contract must be made or commenced not
later than the April 1 following the taxable year in which You attain age 70 and
must be made in accordance with Section 401(a)(9) of the Code.
The Contracts and Certificates thereunder offered by the Prospectus may be
purchased from representatives of 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"). Allmerica
Investments, 440 Lincoln Street, Worcester, Massachusetts 01653, is indirectly
wholly-owned by the Company. You may direct any inquiries to the Company's Home
Office, First Allmerica Financial Life Insurance Company, 440 Lincoln Street,
Worcester, Massachusetts 01653.
Written requests required under the Contract must be in a form satisfactory to
the Company and filed at its Home Office. However, with the consent of the
Company, You may make IRA Account investment transfers, contribution allocation
instructions and other specified transactions by telephone request, if a
properly completed authorization form is on file at the Company's Home Office.
CONTRIBUTIONS
Contributions are payable to the Company at its Home Office and must be made by
cash or check. For each contribution, You must indicate in writing:
- - the type of contribution being made;
- - the taxable year for which the contribution is intended (if applicable); and
- - investment allocation instructions.
The initial contribution will be credited to an IRA Account as of the date that
the Company has at its Home Office both (1) a properly completed application for
the IRA Account, and (2) the initial contribution. If an application is
incomplete, or does not specify how payments are to be allocated among the
Sub-Accounts, the initial contribution will be returned within five business
days. For additional contributions made after an IRA Account has been
established, Accumulation Units will be credited at the unit value computed as
of the Valuation Date that the additional contribution is received at the
Company's Home Office.
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Under the Contracts, additional contributions are not limited as to frequency
and number, except that deductible and nondeductible contributions and
contributions to a spousal IRA Account must be received by the Company by April
15 of the year following the calendar year to which the contributions are
attributable.
The minimum initial contribution from a rollover distribution is the lesser of
(1) $3,500, or (2) such smaller amount as meets the Company's then current
rules. The maximum initial contribution is the amount equal to the taxable
portion of your rollover distribution.
After an IRA Account has been established, You may make additional
contributions, subject to the following requirements: The minimum additional
contribution is the lesser of (1) $1,000, or (2) such smaller amount as meets
the Company's then current rules. For any taxable year, the maximum for total
additional deductible and nondeductible contributions is the lesser of (1)
$2,000, or (2) 100% of your compensation for the taxable year as defined in
Section 219(f) of the Code. This maximum does not apply to additional rollover
contributions or spousal IRA contributions discussed below.
You may make an additional rollover contribution as defined in Section
402(a)(5), 402(a)(6), 402(a)(7), 403(a)(4), 403(b)(8) or 408(d)(3) of the Code.
Additional rollover contributions are subject to the minimum additional
contribution discussed above, but not to any maximum for total additional
contributions.
You may also establish and maintain a spousal IRA Account in accordance with
Sections 219(c) and 408(b) of the Code. The maximum total contributions to both
IRA Accounts in any taxable year is $2,250, of which amount no more than $2,000
may be contributed to any one IRA Account.
Generally, contributions will be allocated among the Sub-Accounts according to
your instructions. However, until the Valuation Date that is 15 days from the
date the IRA Account was established, all Separate Account allocations will be
held in the Sub-Account that invests in the Money Market Fund. Thereafter, all
amounts will be allocated according to your instructions.
If no contributions have been credited to the IRA Account for three consecutive
Certificate years and, at any time thereafter, the IRA Account's Accumulated
Value is less than $1,000, the Company reserves the right to terminate the IRA
Account for its Accumulated Value.
TRANSFER PRIVILEGE
Prior to the Annuity Date, You may have amounts transferred among the
Sub-Accounts, subject to the restrictions stated below. Requests for transfers
must be in writing. Transfers will be made on the Valuation Date coincident
with, or next following, the date the written request is received by the
Company.
During each calendar year, You may make up to four transfers among Sub-Accounts
of the Separate Account or General Account, where available. In addition, You
may transfer from a Sub-Account of the General Account on the Sub-Account
maturity date.
The maximum dollar amount that may be transferred during a calendar year from
Sub-Accounts of the General Account prior to their maturity date is 20% of the
value on the preceding December 31 of the portion of the Accumulated Value of
the IRA Account that was allocated to the General Account. Transfers from such
Sub-Accounts will be made on a LIFO (last-in-first-out) basis, so that transfers
will be first made from the most recently established Sub-Account.
Automatic transfers may also be made from policy value allocated to the
Company's General Account (a) to one or more of the Sub-Accounts or (b) in order
to reallocate Policy value among Sub-accounts. Automatic transfers from the
General Account may be made on a monthly, bimonthly, or quarterly basis,
provided that:
- - the amount of each monthly transfer cannot exceed 10% of policy value in the
General Account as of the date of the first transfer;
- - each bimonthly transfer cannot exceed 20% of policy value in the General
Account as of the date of the first transfer;
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- - each quarterly transfer cannot exceed 25% of policy value in the General
Account as of the date of the first transfer.
All transfers from Sub-Accounts must involve a minimum of $500, or the entire
amount in Sub-Account, if less. If any transfer would reduce the value of the
Sub-Account from which the transfer is to be made to less than $1,000, the
Company reserves the right to include such remaining value in the amount
transferred.
The Company makes no charge for transfers.
SURRENDER PRIVILEGE
At any time prior to the Annuity Date, You may request surrender of the IRA
Account and receive its Surrender Value. You must return a signed, written
request for surrender and the Certificate to the Company's Home Office. The
Surrender Value will be based on the Accumulated Value of the IRA Account as of
the Valuation Date coincident with or next following the date the Company
receives the written request and Certificate at its Home Office.
A withdrawal charge may be deducted when an IRA Account is surrendered if all or
a portion of the Accumulated Value is allocated to Sub-Accounts of the General
Account. See "CHARGES AND DEDUCTIONS." The IRA Account Fee will be deducted upon
surrender of the IRA Account.
Any amount surrendered is normally payable within seven days following the
Company's receipt of the surrender request. The Company reserves the right to
defer surrenders and partial redemptions of amounts in each Sub-Account of the
Separate Account during any period which (1) trading on the New York Stock
Exchange is restricted as determined by the SEC or such Exchange is closed for
other than weekends and holidays, (2) the SEC has by order permitted such
suspension, or (3) an emergency, as determined by the SEC, exists such that
disposal of portfolio securities or valuation of the assets of the Separate
Account is not reasonably practicable.
The right is reserved by the Company to defer surrenders and partial redemptions
of amounts allocated to a Sub-Account of the General Account for a period not to
exceed six months.
For important tax consequences which may result from surrender, see "FEDERAL TAX
CONSIDERATIONS."
REDEMPTION PRIVILEGE
At any time prior to the Annuity Date, You may redeem a portion of the
Accumulated Value of your IRA Account, subject to the limits stated below. You
must file a signed, written request for redemption at the Company's Home Office.
The written request must indicate the dollar amount You wish to receive and the
Sub-Account of the Separate Account from which such amount is to be redeemed.
Withdrawals from a Sub-Account of the General Account will be made on a LIFO
(last-in-first-out) basis, so that withdrawals will be first made from the most
recently established Sub-Account of the General Account. The amount redeemed
equals the amount You requested plus any applicable withdrawal charge, as
described under "CHARGES AND DEDUCTIONS."
Where allocations have been made to more than one Sub-Account, a percentage of
the partial redemption may be allocated to each Sub-Account. A partial
redemption from a Sub-Account of the Separate Account will result in
cancellation of a number of units equivalent in value to the amount redeemed,
computed as of the Valuation Date coincident with or next following the date the
Company receives the written request at its Home Office.
Each partial redemption must be in a minimum amount of $500. No partial
redemption will be permitted if the Accumulated Value remaining in the IRA
Account would be reduced to less than $1,000. Partial redemptions will be paid
in accordance with the time limitations described under "Surrender." For
important tax consequences which may result from partial redemptions, see
"FEDERAL TAX CONSIDERATIONS."
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DEATH BENEFIT
If your death occurs prior to the Annuity Date, a death benefit will be paid to
the beneficiary. The death benefit is equal to the Accumulated Value of the IRA
Account as of the Valuation Date coincident with or next following the date of
receipt of due proof of death at the Company's Home Office.
The death benefit generally will be paid to the beneficiary in one sum. However,
You may direct that all or part of the death benefit be paid under one or more
of the annuity options provided in the Contract. See "Description of Annuity
Options." The beneficiary may also request in writing to be paid in accordance
with an annuity option under the Contract.
If your death occurs on or after the Annuity Date but before the completion of
all guaranteed monthly annuity payments, any unpaid amounts or installments will
be paid to the beneficiary. If there is more than one beneficiary, the death
benefit will be paid in one sum. This sum will be the commuted value of any
unpaid payments certain, commuted on the basis of the interest rate used in the
determination of the annuity benefit as of the Valuation Date coincident with or
next following the date of receipt by the Company at its Home Office of due
proof of death.
If the beneficiary elects to receive the death benefit in one sum, the death
benefit will be paid within seven days of the date on which due proof of death
is received at the Company's Home Office. The death benefit will reflect any
earnings or losses experienced during the period and any withdrawals.
THE SPOUSE OF THE PARTICIPANT-OWNER AS BENEFICIARY
If You die prior to the Annuity Date leaving your spouse as beneficiary, at the
written request of the spousal beneficiary and with the consent of the Company,
the death benefit will not be paid and the spousal beneficiary will become the
Participant-Owner of the IRA Account. However, all or a portion of the death
benefit may be withdrawn without charge within one year of the date on which
notice of death is received at the Company's Home Office. All rights and
benefits provided under the Contract will continue, except that any subsequent
spouse of such new Participant-Owner will not be entitled to continue the IRA
Account upon such new Participant-Owner's death.
OWNERSHIP AND NON-ALIENATION OF IRA ACCOUNTS
You are the owner of your IRA Account. IRA Accounts may not be transferred by
You. No part of your interest in an IRA Account can be forfeited. You may not
make any loans under an IRA Account. An IRA Account cannot be pledged, assigned
or otherwise used to secure a loan.
ELECTING THE FORM OF ANNUITY AND THE ANNUITY DATE
Subject to certain restrictions described below, You have the right to select
the annuity option under which annuity payments are to be made. Annuity payments
are determined according to the annuity tables in the Contract and by the
annuity option selected. All annuity options are funded through the General
Account. See APPENDIX A, "MORE INFORMATION ABOUT THE GENERAL ACCOUNT."
Accumulated Value will be transferred to the General Account of the Company, and
the annuity payments will be fixed in amount.
The annuity option selected must produce an initial payment of at least $50. If
the annuity option(s) selected does not produce initial payments which meet this
minimum, the Company will pay the Surrender Value or death benefit, as the case
may be, in one sum. Once the Company begins making annuity payments, You cannot
make partial redemptions or surrender the annuity benefit. Only beneficiaries
entitled to receive remaining payments for a "period certain" may elect to
instead receive a lump sum settlement.
You select the Annuity Date. The Annuity Date may be the first day of any month
on or after the Participant-Owner's 50th birthday but before the
Participant-Owner's 85th birthday. You may elect to change the
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Annuity Date by sending a written request to the Company's Home Office at least
one month before the new Annuity Date. The Code imposes limitations on the age
at which distributions may commence. See "FEDERAL TAX CONSIDERATIONS" for
further information.
If You do not elect otherwise, annuity payments will be made in accordance with
Option I, a life annuity with 120 monthly payments guaranteed. Changes in an
annuity option choice can be made up to one month prior to the Annuity Date.
DESCRIPTION OF ANNUITY OPTIONS
The Company currently provides the annuity options described below. Other
annuity options may be offered by the Company.
OPTION I -- LIFE ANNUITY WITH 120 MONTHLY PAYMENTS GUARANTEED
Option I is an annuity payable monthly during the lifetime of the payee with
the guarantee that if the payee should die before 120 monthly payments have
been paid, the monthly annuity payments will continue to the beneficiary
until a total of 120 monthly payments have been paid.
OPTION II -- LIFE ANNUITY
Option II is an annuity payable monthly only during the lifetime of the
payee. It would be possible under this option for the payee to receive only
one annuity payment if the payee dies prior to the due date of the second
annuity payment, two annuity payments if the payee dies before the due date
of the third annuity payment, and so on. However, payments will continue
during the lifetime of the payee, no matter how long the payee lives.
OPTION III -- UNIT REFUND LIFE ANNUITY
Option III is an annuity payable monthly during the lifetime of the payee
with the guarantee that if (1) exceeds (2) then monthly annuity payments
will continue to the beneficiary until the number of such payments equals
the number determined in (1).
Where: (1) is the dollar amount of the Accumulated Value divided by the
dollar amount of the first monthly payment (which determines the
greatest number of payments payable to the beneficiary), and
(2) is the number of monthly payments paid prior to the death of the
payee.
OPTION IV-A -- JOINT AND SURVIVOR LIFE ANNUITY
Option IV-A is a monthly annuity payable jointly to two payees during their
joint lifetime, and then continuing during the lifetime of the survivor. The
amount of each payment to the survivor is based on the same amount paid
during the joint lifetime of the two payees. One of the payees must be
either You or the beneficiary. There is no minimum number of payments under
this option.
OPTION IV-B -- JOINT AND TWO-THIRDS SURVIVOR LIFE ANNUITY
Option IV-B is a monthly annuity payable jointly to two payees during their
joint lifetime, and then continuing thereafter during the lifetime of the
survivor. However, the amount of each monthly payment to the survivor is
based upon two-thirds of the amount which applied during the joint lifetime
of the two payees. One of the payees must be You or the beneficiary. There
is no minimum number of payments under this option.
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OPTION V -- PERIOD CERTAIN ANNUITY
Option V is a monthly annuity payable for a stipulated number of from one to
thirty years. The annuity value applied under this option will be the
Surrender Value. If the payee dies before the completion of the period
stipulated under Option V, payments will continue to be paid to the
beneficiary.
Option V does not involve a life contingency. In the computation of the
payments under this option (see "Determination of Annuity Payments"), the
charge for annuity rate guarantees, which includes a factor for mortality
risks, is made. See "FEDERAL TAX CONSIDERATIONS" for a discussion of the
possible adverse tax consequences of selecting Option V.
IRA ACCOUNT VALUES AND ANNUITY PAYMENTS
IRA Account values and annuity payments are computed as follows:
THE ACCUMULATION UNIT. Each net contribution is allocated to the Sub-Account(s)
selected by You. Allocations to the Sub-Accounts of the Separate Account are
credited to the IRA Account in the form of Accumulation Units. Accumulation
Units are credited separately for each Sub-Account of the Separate Account. The
number of Accumulation Units of each Sub-Account credited to the IRA Account is
equal to the portion of the net contribution allocated to the Sub-Account,
divided by the dollar value of the applicable Accumulation Unit as of the
Valuation Date such contribution is allocated. The number of Accumulation Units
resulting from each contribution will remain fixed unless changed by a
subsequent split of Accumulation Unit value, a transfer, a partial redemption,
or surrender. The dollar value of an Accumulation Unit of each Sub-Account
varies from Valuation Date to Valuation Date based on the investment experience
of that Sub-Account and will reflect the investment performance, expenses and
charges of its Funds. The value of an Accumulation Unit was set at $100.0000 on
the first Valuation Date for each Sub-Account of the Separate Account.
Allocations to Sub-Accounts of the General Account are not converted into
Accumulation Units, but are credited interest at a rate periodically set by the
Company. See APPENDIX A, "MORE INFORMATION ABOUT THE GENERAL ACCOUNT."
The Accumulated Value of the IRA Account is determined by
- - MULTIPLYING the number of Accumulation Units in each Sub-Account of the
Separate Account by the dollar value of an Accumulation Unit of that
Sub-Account on the Valuation Date,
- - ADDING the products, and
- - ADDING the amount of the accumulations in the Sub-Accounts of the General
Account , if any.
ADJUSTED GROSS INVESTMENT RATE. At each Valuation Date an adjusted gross
investment rate for each Sub-Account of the Separate Account for the Valuation
Period then ended is determined from the investment performance of that
Sub-Account. Such rate is (1) the investment income of that Sub-Account for the
Valuation Period, plus capital gains and minus capital losses of that
Sub-Account for the Valuation Period, whether realized or unrealized, adjusted
for provisions made for taxes, if any, divided by (2) the amount of that
Sub-Account's assets at the beginning of the Valuation Period. The adjusted
gross investment rate may be either positive or negative.
NET INVESTMENT RATE AND NET INVESTMENT FACTOR. The net investment rate for
variable accumulations a Sub-Account of a Separate Account for any Valuation
Period is equal to the adjusted gross investment rate of the Sub-Account for
such Valuation Period, decreased by the equivalent for such period of a charge
equal to 1.15% per annum. This charge cannot be increased.
The dollar value of an Accumulation Unit as of a given Valuation Date is
determined by multiplying the dollar value of the corresponding Accumulation
Unit as of the immediately preceding Valuation Date by the appropriate net
investment factor. The net investment factor is 1.000000 plus the applicable net
investment rate.
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For an illustration of Accumulation Unit calculation using a hypothetical
example, see "ANNUITY PAYMENTS" in the Statement of Additional Information.
DETERMINATION OF ANNUITY PAYMENTS. The amount of the first monthly annuity
payment is based on the annuity value applied and the annuity option selected.
The annuity value applied under an annuity option is the amount described below,
minus any applicable premium tax charge: (1) if Option V is chosen -- the
Surrender Value; (2) if any other annuity option offered by the Company is
chosen -- the Accumulated Value; and (3) if a death benefit annuity is payable
at any time -- the amount of the death benefit.
Annuity values will be based on a Valuation Date applied uniformly not more than
four weeks preceding the Annuity Date. Currently, the Valuation Date for annuity
values is the 15th date of the month preceding the Annuity Date, and annuity
payments are made on the first of the month based on unit values as of the 15th
day of the preceding month.
The Contract provides annuity rates which determine the dollar amount of the
first monthly payment under each form of annuity for each $1,000 of applied
annuity value. Guaranteed life annuity rates in the Contract are based on a
modification of the 1983 Group Annuity Mortality Table on unisex rates.
The amount of the first monthly payment depends upon the form of annuity
selected, the age of the payee and the value of the amount applied under the
annuity option. The dollar amount of each monthly annuity payment is fixed and
will not change, except under the joint and two-thirds survivor annuity option.
The Company may from time to time offer fixed annuity rates more favorable than
those contained in the Contract. Any such rates will be applied uniformly to all
Participant-Owners of the same class.
FEDERAL TAX CONSIDERATIONS
The effect of federal income taxes on the value of an IRA Account, on
redemptions or surrenders, on annuity payments, and on the economic benefit to
You or the beneficiary depends upon a variety of factors. The following
discussion is based upon the Company's understanding of current federal income
tax laws as they are interpreted as of the date of this Prospectus. No
representation is made regarding the likelihood of continuation of current
federal income tax laws or of current interpretations by the IRS.
IT SHOULD BE RECOGNIZED THAT THE FOLLOWING DISCUSSION OF FEDERAL INCOME TAX
ASPECTS OF AMOUNTS RECEIVED UNDER VARIABLE ANNUITY CONTRACTS AND INDIVIDUAL
RETIREMENT ANNUITIES IS NOT EXHAUSTIVE, DOES NOT PURPORT TO COVER ALL SITUATIONS
AND IS NOT INTENDED AS TAX ADVICE. A QUALIFIED TAX ADVISER SHOULD ALWAYS BE
CONSULTED WITH REGARD TO THE APPLICATION OF LAW TO INDIVIDUAL CIRCUMSTANCES.
The Company intends to make a charge for any effect which the income, assets, or
existence of the Contracts, the Separate Account or its Sub-Accounts may have
upon the Company's tax. The Separate Account presently is not subject to tax,
but the Company reserves the right to assess a charge for taxes should the
Separate Account at any time become subject to tax. Any charge for taxes will be
assessed on a fair and equitable basis in order to preserve equity among classes
of Participant-Owners and with respect to each Separate Account as though that
Separate Account were a separate taxable entity.
The Separate 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 Code. The Company files a consolidated tax return with
certain of its subsidiaries.
TAXATION OF THE CONTRACTS IN GENERAL
The Company believes that the Contracts and IRA Accounts described in this
Prospectus will be considered annuities under Section 72 of the Code. This
section provides for the taxation of annuities. The following discussion
concerns annuities subject to Section 72.
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With certain exceptions, any increase in the Accumulated Value of the IRA
Account is not taxable to You until it is withdrawn. If the IRA Account is
surrendered or amounts are withdrawn prior to the Annuity Date, to the extent of
the amount withdrawn any investment gain in value over the cost basis of the IRA
Account would be taxed as ordinary income.
A 10% penalty tax may be imposed on the withdrawal of investment gains if the
withdrawal is made prior to age 59 1/2. The penalty tax will not be imposed
after age 59 1/2, or if the withdrawal follows your death, or in the case of
your "total disability" (as defined in the Code). Furthermore, under Section 72
of the Code, this penalty tax will not be imposed, irrespective of age, if the
amount received is one of a series of "substantially equal" periodic payments
made at least annually for the life or life expectancy of the payee. This
requirement is met when You elect to have distributions made over your life
expectancy, or over the joint life expectancy of You and the beneficiary.
In a private letter ruling, the IRS took the position that where distributions
from a variable annuity contract were determined by amortizing the accumulated
value of the contract over the taxpayer's remaining life expectancy (such as
under the Policy's LED), and could be changed or terminated at any time, the
distributions failed to qualify as part of a "series of substantially equal
payments" within the meaning of Section 72 of the Code. The distributions were
therefore subject to the 10% federal tax penalty. This private letter ruling may
be applicable to a Participant-Owner who receives distributions under the LED
prior to age 59 1/2. Subsequent private letter rulings, however, have treated
LED -- type withdrawal programs as effectively avoiding the 10% penalty tax. The
position of the IRS on this issue is unclear.
When annuity payments are commenced under the Contract and You have a cost
basis, generally a portion of each payment may be excluded from gross income.
The excludable portion is generally determined by a formula that establishes the
ratio that the cost basis of the IRA Account bears to the expected return under
the IRA Account. The portion of the payment in excess of this excludable amount
is taxable as ordinary income. Once all cost basis in the IRA Account is
recovered, the entire payment is taxable. If the last payee dies before cost
basis is recovered, a deduction for the difference is allowed on the payee's
final tax return.
TAX WITHHOLDING AND PENALTIES
The Code requires withholding with respect to payments or distributions from
annuities, unless a taxpayer elects not to have withholding. In addition, the
Code requires reporting to the IRS of the amount of income received with respect
to payment or distributions from annuities.
In certain situations, the Code provides for a tax penalty if, prior to death,
disability or attainment of age 59 1/2, You make a withdrawal or receive any
amount under the Policy, unless the distribution is in the form of a life
annuity (including life expectancy distributions). The penalty is 10% of the
amount includible in income by You.
INDIVIDUAL RETIREMENT ACCOUNTS IN GENERAL
Any individual who earns "compensation" (as defined in the Code and including
alimony) from employment or self-employment, whether or not he or she is covered
by another qualified plan, may establish an individual retirement account or
annuity plan ("IRA") for the accumulation of retirement savings on a tax-
deferred basis. Income from investments is not included in "compensation." The
assets of an IRA may be invested in, among other things, the IRA Account offered
under the Contracts.
Contributions to an IRA may be made by the individual or on behalf of the
individual by an employer. IRA contributions may be deductible up to the lesser
of (1) $2,000 or (2) 100% of compensation. The deduction is reduced
proportionately for adjusted gross income between $40,000 and $50,000 (between
$25,000 and $35,000 for unmarried taxpayers and between $0 and $10,000 for a
married taxpayer filing separately) if the taxpayer and his or her spouse file a
joint return and either is an active participant in an employer-sponsored
retirement plan.
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An individual and a working spouse each may have an IRA with the above-described
limit on each. An individual with an IRA may establish an additional IRA for a
non-working spouse if they file a joint return. Under the Contracts,
contributions to the two IRAs together are deductible up to the lesser of $2,250
or 100% of compensation.
No deduction is allowed for contributions made for the year in which the
individual attains age 70 1/2 and years thereafter. Contributions for that year
and for years thereafter will result in certain adverse tax consequences.
Non-deductible contributions may be made to IRAs until the year in which the
individual attains age 70 1/2. Although these contributions may not be deducted,
taxes on their earnings are deferred until the earnings are distributed. Under
the Contracts, the maximum permissible non-deductible contribution is $2,000 for
an individual taxpayer and $2,250 for a taxpayer and non-working spouse. These
limits are reduced by the amount of any deductible contributions made by the
taxpayer.
Contributions may be made with respect to a particular year until the due date
of the individual's federal income tax return for that year, not including
extensions. However, for reporting purposes, the Company will regard
contributions as being applicable to the year made unless it receives notice to
the contrary.
All annuity payments and other distributions under an IRA will be taxed as
ordinary income unless the owner has made non-deductible contributions. In
addition, a minimum level of distributions must begin no later than April 1
following the year in which the individual attains age 70 1/2 and must be made
in accordance with Section 401(a)(9) of the Code. Failure to make distributions
as so required may result in certain adverse tax consequences to the individual.
Distributions from all of an individual's IRAs are treated as if they were a
distribution from one IRA and all distributions during the same taxable year are
treated as if they were one distribution. An individual who makes a
non-deductible contribution to an IRA or receives a distribution from an IRA
during the taxable year must provide certain information on the individual's tax
return to enable the IRS to determine the proportion of the IRA balance which
represents non-deductible contributions. If the required information is
provided, that part of the amount withdrawn which is proportionate to the
individual's aggregate non-deductible contributions over the aggregate balance
of all of the individual's IRAs, is excludable from income.
Distributions which are a return of a non-deductible contribution are
non-taxable, as they represent a return of basis. If the required information is
not provided to the IRS, distributions from an IRA to which both deductible and
non-deductible contributions have been made are presumed to be fully taxable.
REPORTS
You will be sent a report semi-annually which states certain financial
information about the Funds. The Company will also furnish an annual report to
You containing a statement of your account, including unit values and other
information required by applicable law, rules and regulations.
CHANGES IN OPERATION OF THE SEPARATE ACCOUNT
The Company reserves the right, subject to compliance with applicable law, to:
- - transfer assets from the Separate Account or any of its Sub-Accounts to
another of the Company's separate accounts or sub-accounts having assets of
the same class;
- - to operate the Separate Account or any of its Sub-Accounts as a management
investment company under the 1940 Act or in any other form permitted by law,
- - to deregister the Separate Account under the 1940 Act in accordance with the
requirements of the 1940 Act; or
- - and (4) to substitute the shares of any other registered investment company
for the Fund shares held by a Sub-Account of the Separate Account, in the
event that Fund shares are unavailable for investment, or if
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the Company determines that further investment in such Fund shares is
inappropriate in view of the purpose of the Sub-Account. In no event will the
changes described above be made without notice to You in accordance with the
1940 Act. The Company reserves the right, subject to compliance with
applicable law, to change the name of the Separate Account or any of its
Sub-Accounts.
LEGAL MATTERS
There are no legal proceedings pending to which the Separate Account is a party.
FURTHER INFORMATION
A Registration Statement under the 1933 Act relating to this offering has been
filed with the Commission. Certain portions of the Registration Statement and
amendments have been omitted from this Prospectus pursuant to the rules and
regulations of the Commission. The omitted information may be obtained from the
Commission principal office in Washington, D.C., upon payment of the
Commission's prescribed fees.
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APPENDIX A
MORE INFORMATION ABOUT THE GENERAL ACCOUNT
Because of exemption and exclusionary provisions in the securities laws,
interests in the General Account are not generally subject to regulation under
the provisions of the 1933 Act or the 1940 Act. Disclosures regarding the fixed
portion of the Contract and the Sub-Accounts of the General Account may be
subject to the provisions of the 1933 Act concerning the accuracy and
completeness of statements made in the Prospectus. The disclosures in this
APPENDIX A have not been reviewed by the SEC. ALLOCATIONS TO AND TRANSFERS TO
AND FROM THE GENERAL ACCOUNT ARE NOT PERMITTED IN CERTAIN STATES.
The General Account of the Company is made up of all of the general assets of
the Company other than those allocated to any separate account. Allocations to
the General Account become part of the assets of the Company and are used to
support insurance and annuity obligations.
A portion or all of net contributions may be allocated to a Sub-Account within
the General Account to accumulate at a fixed rate of interest. Such net amounts
are guaranteed by the Company as to principal and a minimum rate of interest.
Under the Contracts, the minimum interest which may be credited on amounts
allocated to a Sub-Account of the General Account is 4.5% compounded annually
for the first five Certificate years, 4% compounded annually for the next five
Certificate years, and 3.5% compounded annually thereafter. Additional "excess
interest" may or may not be credited at the sole discretion of the Company.
Currently, Sub-Accounts of the General Account will mature at three-year
intervals. In no case will excess interest be guaranteed for periods of less
than one year.
Additional contributions allocated all or in part to a Sub-Account of the
General Account must be received by the Company no later than 1:00 p.m. Eastern
time to be applied to the Sub-Account of the General Account on the date of
receipt. Additional contributions received after 1:00 p.m. will be credited to
the Sub-Account of the General Account on the next business day.
At least 30 days prior to the maturity date of a Sub-Account of the General
Account, the Company will notify the Participant-Owner of the new interest rate
and maturity date that will apply to the new Sub-Account on the maturity date.
Unless the Participant-Owner directs otherwise, the Accumulated Value of the IRA
Account allocated to the matured Sub-Account will be allocated to the new
Sub-Account.
If an IRA Account with Accumulated Value allocated to one or more Sub-Accounts
of the General Account is surrendered, or if a partial redemption is made from a
Sub-Account of the General Account, a withdrawal charge of 4% will be made on
any amounts withdrawn from such Sub-Accounts. The withdrawal charge will not
apply to amounts withdrawn on a maturity date or under a LED distribution as
provided in the Contract, see "LED Distributions."
If a period certain option is chosen (Option V), a withdrawal charge will be
deducted from the Accumulated Value of the IRA Account. Such charge is the same
as that which would apply had the IRA Account been surrendered on the Annuity
Date.
A-1
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
STATEMENT OF ADDITIONAL INFORMATION
FOR
GROUP VARIABLE ANNUITY CONTRACTS FUNDED THROUGH
SEPARATE ACCOUNT I
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS. IT SHOULD BE READ
IN CONJUNCTION WITH THE PROSPECTUS FOR THE SEPARATE ACCOUNT DATED MAY 1, 1997
("THE PROSPECTUS"). THE PROSPECTUS MAY BE OBTAINED FROM ALLMERICA INSTITUTIONAL
SERVICES, STATION C-36, FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY, 440
LINCOLN STREET, WORCESTER, MASSACHUSETTS 01653.
DATED: MAY 1, 1997
-4-
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
GENERAL INFORMATION AND HISTORY.....................................2
TAXATION OF THE CONTRACTS, THE SEPARATE ACCOUNT AND THE
COMPANY.............................................................3
SERVICES............................................................3
UNDERWRITERS........................................................4
ANNUITY PAYMENTS....................................................4
PERFORMANCE INFORMATION.............................................6
FINANCIAL STATEMENTS................................................7
GENERAL INFORMATION AND HISTORY
Separate Account I (the "Separate Account") is a separate investment account
of First Allmerica Financial Life Insurance Company (the "Company")
established by vote of its Board of Directors on August 20, 1991. The
Company, organized under the laws of Massachusetts in 1844, is the fifth
oldest life insurance company in America. As of December 31, 1996, the
Company and its subsidiaries had over $13.3 billion in combined assets, and
over $45.3 billion of life insurance in force. Effective October 16, 1995, the
Company converted from a mutual life insurance company known as State Mutual
Life Assurance Company of America to a stock life insurance company and
adopted its present name. The Company is a wholly owned subsidiary of
Allmerica Financial Corporation ("AFC"). The Company's principal office
("Principal Office") is located at 440 Lincoln Street, Worcester,
Massachusetts 01653, Telephone 508-855-1000.
The Company is subject to the laws of the Commonwealth of Massachusetts
governing insurance companies and to regulation by the Commissioner of Insurance
of Massachusetts. In addition, the Company is subject to the insurance laws and
regulations of other states and jurisdictions in which it is licensed to
operate.
The Separate Account currently consists of seven Sub-Accounts. Each Sub-Account
invests in a corresponding investment portfolio of Allmerica Investment Trust
(the "Trust"). The Trust is managed by Allmerica Investment Management Company,
Inc. ("Manager").
-5-
<PAGE>
The Trust is an open-end, diversified management investment company. Seven
different investment portfolios of the Trust are available under the Contracts:
the Growth Fund, Investment Grade Income Fund, Money Market Fund, Equity Index
Fund, Government Bond Fund, Select Aggressive Grown Fund, and Select
International Equity Fund (the "Funds"). Each Fund has its own investment
objectives, sub-adviser and certain attendant risks.
TAXATION OF THE CONTRACTS, THE SEPARATE
ACCOUNT AND THE COMPANY
The Company currently imposes no charge for taxes payable in connection with the
Contracts, 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
Contracts or the Separate Account.
The Separate Account is considered to be a part of and taxed with the operations
of the Company. The Company is taxed as a life insurance company under
subchapter L of the Internal Revenue Code (the "Code"), and files a consolidated
tax return with its parent and affiliated companies.
The Company reserves the right to make a charge for any effect which the income,
assets or existence of the Contracts or the Separate 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 Participant-Owners. The
Separate Account presently is not subject to tax.
SERVICES
CUSTODIAN OF SECURITIES. The Company serves as custodian of the assets of the
Separate Account. Fund shares owned by the Sub-Accounts are held on an open
account basis. A Sub-Account's ownership of Fund shares is reflected on the
records of the Fund and is not represented by any transferable stock
certificates.
EXPERTS. The financial statements of the Company at December 31, 1996 and 1995,
and for each of the three years in the period ended December 31, 1996, and of
Separate Account I of the Company at December 31, 1996, and for the periods
indicated, included in this Statement of Additional Information ("SAI")
constituting part of the Registration Statement, have been so included in
reliance on the report of Price Waterhouse 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
Contracts.
UNDERWRITERS
Allmerica Investments, Inc., a registered broker-dealer under the Securities
Exchange Act of 1934
-6-
<PAGE>
and a member of the National Association of Securities Dealers, Inc. (NASD),
serves as principal underwriter for the Contracts pursuant to a contract with
Allmerica Investments, Inc., the Company and the Separate Account. Allmerica
Investments, Inc. distributes the Policies on a best-efforts
basis. Allmerica Investments, Inc., 440 Lincoln Street, Worcester,
Massachusetts 01653, was organized in 1969 as a wholly owned subsidiary of the
Company and presently is indirectly wholly owned by the Company.
All persons selling the Contracts and Certificates thereunder are required to be
licensed by their respective state insurance authorities for the sale of
variable annuity Contracts. Commissions are not paid by the Company on sales of
the Contracts and Certificates.
The Company intends to recoup against the fixed account of the Company's general
account, sales expense through a combination of anticipated surrender, partial
redemption, and/or annuitization charges, 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.
ANNUITY PAYMENTS
The method by which the Accumulated Value under the Contracts is determined is
described in detail under "COMPUTATION OF IRA ACCOUNT VALUES AND ANNUITY
PAYMENTS" in the Prospectus.
ILLUSTRATION OF ACCUMULATION UNIT CALCULATION USING HYPOTHETICAL EXAMPLE. The
Accumulation Unit calculation for a daily Valuation Period may be illustrated by
the following hypothetical example: Assume that the assets of a Sub-Account at
the beginning of a one-day Valuation Period were $5,000,000; that the value of
an Accumulation Unit on the previous date was $1.135000; and that during the
Valuation Period, the investment income and net realized and unrealized capital
gains exceed net realized and unrealized capital losses by $1,675. The
Accumulation Unit value at the end of the current Valuation Period would be
calculated as follows:
(1) Accumulation Unit Value -- Previous Valuation Period............$ 1.135000
(2) Value of Assets -- Beginning of Valuation Period................ $5,000,000
(3) Excess of Investment Income and Net Gains Over Capital Losses........$1,675
(4) Adjusted Gross Investment Rate for the Valuation Period (3) + (2)..0.000335
(5) Annual Charge (one-day equivalent of 1.15% per annum)..............0.000032
(6) Net Investment Rate (4)-(5)........................................0.000303
-7-
<PAGE>
(7) Net Investment Factor 1.000000 + (6)...............................1.000303
(8) Accumulation Unit Value -- Current Period (1) x (7).............$ 1.135344
Conversely, if unrealized capital losses and charges for expenses and taxes
exceeded investment income and net realized capital gains by $1,675, the
accumulated unit value at the end of the Valuation Period would have been
$1.134583.
The method for determining the amount of annuity payments is described in detail
under "K. Computation of Contract Values and Annuity Payments" in the
Prospectus.
ILLUSTRATION OF VARIABLE ANNUITY PAYMENT CALCULATION USING HYPOTHETICAL EXAMPLE.
The determination of the Annuity Unit value and the variable annuity payment may
be illustrated by the following hypothetical example: Assume a
Participant-Owner has 40,000 Accumulation Units in a Separate Account, and that
the value of an Accumulation Unit on the Valuation Date used to determine the
amount of the first variable annuity payment is $1.120000. Therefore, the
Accumulation Value of the Contract is $44,800 (40,000 x $1.120000). Assume also
that the Participant-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 or redemption charge, the first monthly payment would be 44.800
multiplied by $6.57, or $294.34.
Next, assume that the Annuity Unit value for the assumed rate of 3.5% per annum
for the Valuation Date as of which the first payment was calculated was
$1.100000. Annuity Unit values will not be the same as Accumulation Unit values
because the former reflect the 3.5% assumed interest rate used in the annuity
rate calculations. When the Annuity Unit value of $1.100000 is divided into the
first monthly payment the number of Annuity Units represented by that payment is
determined to be 267.5818. The value of this same number of Annuity Units will
be paid in each subsequent month under most options. Assume further that the
net investment factor for the Valuation Period applicable to the next annuity
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 is then 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 is then 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.
PERFORMANCE INFORMATION
The following describes how performance information will be calculated with
respect to the Sub-Accounts.
TOTAL RETURN
"Total Return" refers to the total of the income generated by an investment in a
Sub-Account and
-8-
<PAGE>
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-Accounts asset charge and the deduction of the $25 IRA Account Fee.
Total Return figures are calculated by standardized methods prescribed by rules
of the Securities and Exchange Commission (the "SEC"). The quotations are
computed by finding the average annual compounded rates of return over the
specified 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 Separate 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 asset of
the Sub-Account. This charge is 1.15% 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 IRA Account at the end of the
period. The deduction of the contingent deferred sales charge, if any,
applicable at the end of the period is included in the calculation, according to
the following schedule:
Contract Year From Date Charge as Percentage
of Payment in Which of New Payments
Surrender Occurs Withdrawn*
1-2 8%
3 7%
4 6%
5 5%
6 4%
7 3%
8 2%
9 1%
*Subject to the maximum limit described in the Prospectus.
No contingent deferred sales charge is deducted upon expiration of the periods
specified above. In all calendar years, an amount equal to the greater of
cumulative earnings, 10% of the Accumulated
-9-
<PAGE>
Value under the Contracts, or the life expectancy distribution, is not subject
to the contingent sales charge.
The calculations of Total Return include the deduction of the $25 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.
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:
P(1 + T)n = EV
Where: P = a hypothetical initial payment to the Separate 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 1.15% annual charge
against the assets of the Sub-Accounts. The ending value assumes that the
Contract is NOT withdrawn at the end of the specified period, and therefore
there is no adjustment for the contingent deferred sales charge that would be
applicable if the Contract was withdrawn at the end of the period.
The calculations of Supplemental Total Return include the deduction of the $25
annual Contract fee.
YIELD AND EFFECTIVE YIELD -- MONEY MARKET SUB-ACCOUNT
Set forth below is the yield and effective yield for the Money Market Account
for the seven-day period ended December 31, 1996:
Yield 4.07%
Effective Yield 4.15%
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
-10-
<PAGE>
(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, subtracting a charge reflecting the annual 1.15%
deduction for mortality and expense risk and the administrative charge, 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 do NOT reflect the $25 annual IRA
Account Fee.
FINANCIAL STATEMENTS
Financial Statements are included for First Allmerica Financial Life Insurance
Company and for its Separate Account I.
-11-
<PAGE>
FIRST ALLMERICA
FINANCIAL LIFE
INSURANCE COMPANY
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
First Allmerica Financial Life Insurance Company
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of shareholder's equity, and of cash flows
present fairly, in all material respects, the financial position of First
Allmerica Financial Life Insurance Company and its subsidiaries at December 31,
1996 and 1995, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As discussed in the accompanying notes to the consolidated financial
statements, the Company changed its method of accounting for investments
(Note 1) and postemployment benefits (Note 11) in 1994.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Boston, Massachusetts
February 3, 1997, except as to Notes 1 and 2,
which are as of February 19, 1997
F-2
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1996 1995 1994
----------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
REVENUES
Premiums................................... $2,236.3 $2,222.8 $2,181.8
Universal life and investment product
policy fees............................... 197.2 172.4 156.8
Net investment income...................... 669.9 710.1 743.1
Net realized investment gains.............. 66.8 19.1 1.1
Realized gain on sale of mutual fund
processing business....................... -- 20.7 --
Other income............................... 102.7 95.4 112.3
--------- --------- ---------
Total revenues......................... 3,272.9 3,240.5 3,195.1
--------- --------- ---------
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims, losses and loss
adjustment expenses....................... 1,957.0 2,010.3 2,047.0
Policy acquisition expenses................ 483.5 470.3 475.7
Other operating expenses................... 483.2 455.0 518.9
--------- --------- ---------
Total benefits, losses and expenses.... 2,923.7 2,935.6 3,041.6
--------- --------- ---------
Income before federal income taxes............. 349.2 304.9 153.5
--------- --------- ---------
FEDERAL INCOME TAX EXPENSE (BENEFIT)
Current.................................... 96.8 119.7 45.4
Deferred................................... (15.7) (37.0) 8.0
--------- --------- ---------
Total federal income tax expense....... 81.1 82.7 53.4
--------- --------- ---------
Income before minority interest, extraordinary
item, and cumulative effect of accounting
change........................................ 268.1 222.2 100.1
Minority interest.............................. (74.6) (73.1) (51.0)
--------- --------- ---------
Income before extraordinary item and cumulative
effect of accounting changes.................. 193.5 149.1 49.1
Extraordinary item -- demutualization
expenses...................................... -- (12.1) (9.2)
Cumulative effect of changes in accounting
principles.................................... -- -- (1.9)
--------- --------- ---------
Net income..................................... $ 193.5 $ 137.0 $ 38.0
--------- --------- ---------
--------- --------- ---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-3
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1996 1995
-------------------------------------------------------- ---------- ----------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities--at fair value (amortized cost of
$7,279.1 and $7,467.9)............................. $ 7,461.5 $ 7,739.3
Equity securities--at fair value (cost of $327.9 and
$410.6)............................................ 473.1 517.2
Mortgage loans...................................... 650.1 799.5
Real estate......................................... 120.7 179.6
Policy loans........................................ 132.4 123.2
Other long-term investments......................... 128.8 71.9
---------- ----------
Total investments............................... 8,966.6 9,430.7
---------- ----------
Cash and cash equivalents............................. 175.9 236.6
Accrued investment income............................. 148.6 163.0
Deferred policy acquisition costs..................... 822.7 735.7
---------- ----------
Reinsurance receivables:
Future policy benefits.............................. 102.8 97.1
Outstanding claims, losses and loss adjustment
expenses........................................... 663.8 799.6
Unearned premiums................................... 46.2 43.8
Other............................................... 62.8 58.9
---------- ----------
Total reinsurance receivables................... 875.6 999.4
---------- ----------
Deferred federal income taxes......................... 93.2 81.2
Premiums, accounts and notes receivable............... 533.0 526.7
Other assets.......................................... 302.2 361.4
Closed Block assets................................... 811.8 818.9
Separate account assets............................... 6,233.0 4,348.8
---------- ----------
Total assets.................................... $18,962.6 $17,702.4
---------- ----------
---------- ----------
LIABILITIES
Policy liabilities and accruals:
Future policy benefits.............................. $ 2,613.7 $ 2,639.3
Outstanding claims, losses and loss adjustment
expenses........................................... 2,944.1 3,081.3
Unearned premiums................................... 822.5 800.9
Contractholder deposit funds and other policy
liabilities........................................ 2,060.4 2,737.4
---------- ----------
Total policy liabilities and accruals........... 8,440.7 9,258.9
---------- ----------
Expenses and taxes payable............................ 615.3 600.3
Reinsurance premiums payable.......................... 31.4 42.0
Short-term debt....................................... 38.4 28.0
Deferred federal income taxes......................... 34.6 47.8
Long-term debt........................................ 2.7 2.8
Closed Block liabilities.............................. 892.1 902.0
Separate account liabilities.......................... 6,227.2 4,337.8
---------- ----------
Total liabilities............................... 16,282.4 15,219.6
---------- ----------
Minority interest..................................... 784.0 758.5
Commitments and contingencies (Notes 14 and 19)
SHAREHOLDER'S EQUITY
Common stock, $10 par value, 1 million shares
authorized, 500,000 shares issued and outstanding.... 5.0 5.0
Additional paid-in-capital............................ 392.4 392.4
Unrealized appreciation on investments, net........... 131.4 153.0
Retained earnings..................................... 1,367.4 1,173.9
---------- ----------
Total shareholder's equity...................... 1,896.2 1,724.3
---------- ----------
Total liabilities and shareholder's equity...... $18,962.6 $17,702.4
---------- ----------
---------- ----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-4
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1996 1995 1994
----------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
COMMON STOCK
Balance at beginning of year............... $ 5.0 $ -- $ --
Demutualization transaction................ -- 5.0 --
--------- --------- ---------
Balance at end of year..................... 5.0 5.0 --
--------- --------- ---------
ADDITIONAL PAID-IN-CAPITAL
Balance at beginning of year............... 392.4 -- --
Contributed from parent.................... -- 392.4 --
--------- --------- ---------
Balance at end of year..................... 392.4 392.4 --
--------- --------- ---------
RETAINED EARNINGS
Balance at beginning of year............... 1,173.9 1,071.4 1,033.4
Net income prior to demutualization........ -- 93.2 38.0
--------- --------- ---------
1,173.9 1,164.6 1,071.4
Demutualization transaction................ -- (34.5) --
Net income subsequent to demutualization... 193.5 43.8 --
--------- --------- ---------
Balance at end of year..................... 1,367.4 1,173.9 1,071.4
--------- --------- ---------
NET UNREALIZED APPRECIATION (DEPRECIATION) ON
INVESTMENTS
Balance at beginning of year............... 153.0 (79.0) 17.5
--------- --------- ---------
Cumulative effect of accounting change:
Net appreciation on available-for-sale
debt securities....................... -- -- 296.1
Provision for deferred federal income
taxes and minority interest........... -- -- (149.1)
--------- --------- ---------
-- -- 147.0
--------- --------- ---------
Effect of transfer of securities from
held-to-maturity to available-for-sale:
Net appreciation on available-for-sale
debt securities....................... -- 22.4 --
Provision for deferred federal income
taxes and minority interest........... -- (9.6) --
--------- --------- ---------
-- 12.8 --
--------- --------- ---------
Appreciation (depreciation) during the
period:
Net appreciation (depreciation) on
available-for-sale securities......... (35.1) 466.0 (492.1)
(Provision) benefit for deferred
federal income taxes.................. 11.8 (163.1) 171.9
Minority interest...................... 1.7 (83.7) 76.7
--------- --------- ---------
(21.6) 219.2 (243.5)
--------- --------- ---------
Balance at end of year................. 131.4 153.0 (79.0)
--------- --------- ---------
Total shareholder's equity......... $1,896.2 $1,724.3 $ 992.4
--------- --------- ---------
--------- --------- ---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-5
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1996 1995 1994
-------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................. $ 193.5 $ 137.0 $ 38.0
Adjustments to reconcile net income to
net cash provided by operating
activities:
Minority interest................... 74.6 73.1 50.1
Net realized gains.................. (66.8) (39.8) (1.1)
Net amortization and depreciation... 44.7 57.7 45.9
Deferred federal income taxes....... (15.7) (37.0) 8.0
Change in deferred acquisition
costs................................ (73.9) (38.4) (34.6)
Change in premiums and notes
receivable, net of reinsurance
payable.............................. (16.8) (42.0) (25.6)
Change in accrued investment
income............................... 16.7 7.0 4.6
Change in policy liabilities and
accruals, net........................ (184.3) 116.2 175.9
Change in reinsurance receivable.... 123.8 (75.6) (31.9)
Change in expenses and taxes
payable.............................. 26.0 7.5 88.0
Separate account activity, net...... 5.2 (0.1) 0.4
Other, net.......................... 38.5 (33.8) 14.0
---------- ---------- ----------
Net cash provided by operating
activities.................... 165.5 131.8 331.7
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals and maturities
of available-for-sale fixed
maturities............................. 3,985.8 2,738.4 2,097.8
Proceeds from disposals of
held-to-maturity fixed maturities...... -- 271.3 304.4
Proceeds from disposals of equity
securities............................. 228.7 120.0 143.9
Proceeds from disposals of other
investments............................ 99.3 40.5 25.9
Proceeds from mortgages matured or
collected.............................. 176.9 230.3 256.4
Purchase of available-for-sale fixed
maturities............................. (3,771.1) (3,273.3) (2,150.1)
Purchase of held-to-maturity fixed
maturities............................. -- -- (111.6)
Purchase of equity securities........... (90.9) (254.0) (172.2)
Purchase of other investments........... (168.0) (24.8) (26.6)
Proceeds from sale of mutual fund
processing business.................... -- 32.9 --
Capital expenditures.................... (12.8) (14.1) (43.1)
Other investing activities, net......... 4.3 4.7 2.4
---------- ---------- ----------
Net cash provided by (used in)
provided by investing
activities.................... 452.2 (128.1) 327.2
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits and interest credited to
contractholder deposit funds........... 268.7 445.8 786.3
Withdrawals from contractholder deposit
funds.................................. (905.0) (1,069.9) (1,187.0)
Change in short-term debt............... 10.4 (4.8) (6.0)
Change in long-term debt................ (0.1) 0.2 0.3
Dividends paid to minority
shareholders........................... (3.9) (4.1) (4.2)
Capital contributed from parent......... -- 392.4 --
Payments for policyholders' membership
interests.............................. -- (27.9) --
Subsidiary treasury stock purchased, at
cost................................... (42.0) (20.9) --
---------- ---------- ----------
Net cash used in financing
activities.................... (671.9) (289.2) (410.6)
---------- ---------- ----------
Net change in cash and cash equivalents..... (54.2) (285.5) 248.3
Net change in cash held in the Closed
Block...................................... (6.5) (17.6) --
Cash and cash equivalents, beginning of
year....................................... 236.6 539.7 291.4
---------- ---------- ----------
Cash and cash equivalents, end of year...... $ 175.9 $ 236.6 $ 539.7
---------- ---------- ----------
---------- ---------- ----------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid........................... $ 18.6 $ 4.1 $ 4.3
Income taxes paid....................... $ 72.0 $ 90.6 $ 46.1
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
First Allmerica Financial Life Insurance Company ("FAFLIC", or the
"Company", formerly State Mutual Life Assurance Company of America ["State
Mutual"]) was organized as a mutual life insurance company until October 16,
1995. FAFLIC converted to a stock life insurance company pursuant to a plan of
reorganization effective October 16, 1995 and became a wholly owned subsidiary
of Allmerica Financial Corporation ("AFC"). The consolidated financial
statements have been prepared as if FAFLIC were organized as a stock life
insurance company for all periods presented. Thus, generally accepted accounting
principles for stock life insurance companies have been applied retroactively
for all periods presented.
The consolidated financial statements of FAFLIC include the accounts of
Allmerica Financial Life Insurance and Annuity Company ("AFLIAC", formerly SMA
Life Assurance Company), its wholly owned life insurance subsidiary,
non-insurance subsidiaries (principally brokerage and investment advisory
subsidiaries), and Allmerica Property and Casualty Companies, Inc. ("Allmerica
P&C", a 59.5%-owned non-insurance holding company). The Closed Block assets and
liabilities at December 31, 1996 and 1995, and its results of operations
subsequent to demutualization are presented in the consolidated financial
statements as single line items. Prior to demutualization such amounts are
presented line by line in the consolidated financial statements (see Note 6).
Unless specifically stated, all disclosures contained herein supporting the
consolidated financial statements at December 31, 1996 and 1995, and the years
then ended exclude the Closed Block related amounts. All significant
intercompany accounts and transactions have been eliminated.
Minority interest relates to the Company's investment in Allmerica P&C and
its only significant subsidiary, The Hanover Insurance Company ("Hanover").
Hanover's 82.5%-owned subsidiary is Citizens Corporation, the holding company
for Citizens Insurance Company of America ("Citizens"). Minority interest also
includes an amount related to the minority interest in Citizens Corporation.
On February 19, 1997, AFC announced a definitive merger agreement under
which it would acquire, at consideration of $33.00 per share, all of the shares
of Allmerica P&C currently held by the minority stockholders. Additional
information pertaining to the merger agreement is included in Note 2,
significant transactions.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management 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. CLOSED BLOCK
As of October 16, 1995, the Company established and began operating a closed
block (the "Closed Block") for the benefit of the participating policies
included therein, consisting of certain individual life insurance participating
policies, individual deferred annuity contracts and supplementary contracts not
involving life contingencies which were in force on October 16, 1995; such
policies constitute the "Closed Block Business". The purpose of the Closed Block
is to protect the policy dividend expectations of such FAFLIC dividend paying
policies and contracts after the demutualization. Unless the Commissioner
consents to an earlier termination, the Closed Block will continue to be in
effect until the date none of the Closed Block policies are in force. On October
16, 1995, FAFLIC allocated to the Closed Block assets in an amount that is
expected to produce cash flows which, together with future revenues from the
Closed Block Business, are reasonably sufficient to support the Closed Block
Business, including provision for payment of policy benefits, certain future
expenses and taxes and for continuation of policyholder dividend scales
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
payable in 1994 so long as the experience underlying such dividend scales
continues. The Company expects that the factors underlying such experience will
fluctuate in the future and policyholder dividend scales for Closed Block
Business will be set accordingly.
Although the assets and income allocated to the Closed Block inure solely to
the benefit of the holders of policies included in the Closed Block, the excess
of Closed Block liabilities over Closed Block assets at October 16, 1995
measured on a GAAP basis represent the expected future post-tax income from the
Closed Block which may be recognized in income over the period the policies and
contracts in the Closed Block remain in force.
If the actual income from the Closed Block in any given period equals or
exceeds the expected income for such period as determined at October 16, 1995,
the expected income would be recognized in income for that period. Further, any
excess of the actual income over the expected income would also be recognized in
income to the extent that the aggregate expected income for all prior periods
exceeded the aggregate actual income. Any remaining excess of actual income over
expected income would be accrued as a liability for policyholder dividends in
the Closed Block to be paid to the Closed Block policyholders. This accrual for
future dividends effectively limits the actual Closed Block income recognized in
income to the Closed Block income expected to emerge from operation of the
Closed Block as determined as of October 16, 1995.
If, over the period the policies and contracts in the Closed Block remain in
force, the actual income from the Closed Block is less than the expected income
from the Closed Block, only such actual income (which could reflect a loss)
would be recognized in income. If the actual income from the Closed Block in any
given period is less than the expected income for that period and changes in
dividends scales are inadequate to offset the negative performance in relation
to the expected performance, the income inuring to shareholders of the Company
will be reduced. If a policyholder dividend liability had been previously
established in the Closed Block because the actual income to the relevant date
had exceeded the expected income to such date, such liability would be reduced
by this reduction in income (but not below zero) in any periods in which the
actual income for that period is less than the expected income for such period.
C. VALUATION OF INVESTMENTS
Effective January 1, 1994, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities" (SFAS No. 115). SFAS No. 115 requires that
investments be classified into one of three categories; held-to-maturity,
available-for-sale, or trading.
The effect of implementing SFAS No. 115, as of January 1, 1994, was an
increase in the carrying value of fixed maturity investments of $335.3 million,
a decrease in deferred policy acquisition costs of $20.8 million, an increase in
policyholder liabilities of $18.4 million, a net increase in deferred income tax
liabilities of $103.7 million, an increase in minority interest of $45.4 million
and an increase in shareholder's equity of $147.0 million, which resulted from
changing the carrying value of certain fixed maturities from amortized cost to
fair value and related adjustments. The implementation had no effect on net
income.
In November 1995, the Financial Accounting Standards Board issued a Special
Report, A GUIDE TO IMPLEMENTATION OF STATEMENT 115 ON ACCOUNTING FOR CERTAIN
INVESTMENTS IN DEBT AND EQUITY SECURITIES, which permitted companies to
reclassify securities, where appropriate, based on the new guidance. As a
result, the Company transferred securities with amortized cost and fair value of
$696.4 million and $725.6 million, respectively, from the held-to-maturity
category to the available-for-sale category, which resulted in a net increase in
shareholder's equity of $12.8 million.
Realized gains and losses on sales of fixed maturities and equity securities
are determined on the specific-identification basis using amortized cost for
fixed maturities and cost for equity securities. Fixed maturities and equity
securities with other than temporary declines in fair value are written down to
estimated fair value resulting in the recognition of realized losses.
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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 management 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 management believes may not be collectible in
full. In establishing reserves, management 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.
Real estate that has been acquired through the foreclosure of mortgage loans
is valued at the estimated fair value at the time of foreclosure. The Company
considers several methods in determining fair value at foreclosure, using
primarily third-party appraisals and discounted cash flow analyses. After
foreclosure, the Company makes a determination as to whether the asset should be
held for production of income or held for sale.
Real estate investments held for the production of income and held for sale
are carried at depreciated cost less valuation allowances, if necessary, to
reduce the carrying value to fair value. Depreciation is generally calculated
using the straight-line method.
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 and real
estate are included in realized investment gains or losses.
D. 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, investment and
loan commitments, and interest rate futures contracts. 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.
E. 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.
F. 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. Property and casualty, group life and group health insurance business
acquisition costs are deferred and amortized over the terms of the insurance
policies. Acquisition costs related to universal life products and
contractholder deposit funds are deferred and amortized in proportion to total
estimated gross profits over the expected life of the contracts using a revised
interest rate applied to the remaining benefit period. Acquisition costs related
to annuity and other life insurance businesses are deferred and amortized,
generally in proportion to the ratio of annual revenue to the estimated total
revenues over the contract periods based upon the same assumptions used in
estimating the liability for future policy benefits. Deferred acquisition costs
for each product are reviewed to determine if they are recoverable from future
income, including investment income. If such costs are determined to be
unrecoverable, they are expensed at the time of determination.
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Although realization of deferred policy acquisition costs is not assured,
management 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.
G. PROPERTY AND EQUIPMENT
Property, equipment and leasehold improvements are stated at cost, less
accumulated depreciation and amortization. Depreciation is provided using the
straight-line or accelerated method over the estimated useful lives of the
related assets which generally range from 3 to 30 years. Amortization of
leasehold improvements is provided using the straight-line method over the
lesser of the term of the leases or the estimated useful life of the
improvements.
H. SEPARATE ACCOUNTS
Separate account assets and liabilities represent segregated funds
administered and invested by the Company for the benefit of certain pension,
variable annuity and variable life insurance contractholders. Assets consist
principally of bonds, common stocks, mutual funds, and short-term obligations at
market value. The investment income, gains, and losses of these accounts
generally accrue to the contractholders and, therefore, are not included in the
Company's net income. Appreciation and depreciation of the Company's interest in
the separate accounts, including undistributed net investment income, is
reflected in shareholder's equity or net investment income.
I. POLICY LIABILITIES AND ACCRUALS
Future policy benefits are liabilities for life, health 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
2 1/2% to 6% for life insurance and 2% to 9 1/2% for annuities. Estimated
liabilities are established for group life and health policies that contain
experience rating provisions. Mortality, morbidity and withdrawal assumptions
for all policies are based on the Company's own experience and industry
standards. Liabilities for universal life include deposits received from
customers and investment earnings on their fund balances, less administrative
charges. Universal life fund balances are also assessed mortality and surrender
charges.
Liabilities for outstanding claims, losses and loss adjustment expenses are
estimates of payments to be made on property and casualty and health insurance
for reported losses and estimates of losses incurred but not reported. These
liabilities are determined using case basis evaluations and statistical analyses
and represent estimates of the ultimate cost of all losses incurred but not
paid. These estimates are continually reviewed and adjusted as necessary; such
adjustments are reflected in current operations. Estimated amounts of salvage
and subrogation on unpaid property and casualty losses are deducted from the
liability for unpaid claims.
Premiums for property and casualty, group life, and accident and health
insurance are reported as earned on a pro-rata basis over the contract period.
The unexpired portion of these premiums is recorded as unearned premiums.
Contractholder deposit funds and other policy liabilities include
investment-related products such as guaranteed investment contracts, deposit
administration funds and immediate participation guarantee funds and consist of
deposits received from customers and investment earnings on their fund balances.
F-10
<PAGE>
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,
management 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.
J. PREMIUM AND FEE REVENUE AND RELATED EXPENSES
Premiums for individual life and health insurance and individual and group
annuity products, excluding universal life and investment-related products, are
considered revenue when due. Property and casualty and group life, accident and
health insurance premiums are recognized as revenue over the related contract
periods. Benefits, losses and related expenses are matched with premiums,
resulting in their recognition over the lives of the contracts. This matching is
accomplished through the provision for future benefits, estimated and unpaid
losses and amortization of deferred policy acquisition costs. Revenues for
investment-related products consist of net investment income and contract
charges assessed against the fund values. Related benefit expenses primarily
consist of net investment income credited to the fund values after deduction for
investment and risk charges. Revenues for universal life products consist of net
investment income, and 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.
K. POLICYHOLDER DIVIDENDS
Prior to demutualization, certain life, health and annuity insurance
policies contained dividend payment provisions that enabled the policyholder to
participate in the earnings of the Company. The amount of policyholders'
dividends was determined annually by the Board of Directors. The aggregate
amount of policyholders' dividends was related to the actual interest,
mortality, morbidity and expense experience for the year and the Company's
judgment as to the appropriate level of statutory surplus to be retained. Upon
demutualization, certain participating individual life insurance policies and
individual annuity and supplemental contracts were transferred to the Closed
Block. The Closed Block was funded to protect the dividend expectations of such
policies and contracts. Accordingly, these policies no longer participate in the
earnings and surplus of the Open Block. Subsequent to demutualization, the
Company ceased issuance of participating policies.
Prior to demutualization, the participating life insurance in force was
16.2% of the face value of total life insurance in force at December 31, 1994.
The premiums on participating life, health and annuity policies were 11.3% and
6.4% of total life, health and annuity statutory premiums prior to
demutualization in 1995 and 1994, respectively. Total policyholders' dividends
were $23.3 million and $32.8 million prior to demutualization in 1995 and 1994,
respectively.
L. FEDERAL INCOME TAXES
AFC, FAFLIC, AFLIAC and FAFLIC's non-insurance domestic subsidiaries file a
consolidated United States federal income tax return. Entities included within
the consolidated group are segregated into either a life insurance or non-life
insurance company subgroup. The consolidation of these subgroups is subject to
certain statutory restrictions on the percentage of eligible non-life tax losses
that can be applied to offset life company taxable income. Allmerica P&C and its
subsidiaries file a separate United States federal income tax return.
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
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
as defined by Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" (SFAS No. 109). These differences result primarily from loss
reserves, policy acquisition expenses, and unrealized appreciation/depreciation
on investments.
M. NEW ACCOUNTING PRONOUNCEMENTS
In March 1995, SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" was issued. This statement
requires companies to write down to fair value long-lived assets whose carrying
value is greater than the undiscounted cash flows of those assets. The statement
also requires that long-lived assets of which management is committed to
dispose, either by sale or abandonment, be valued at the lower of their carrying
amount or fair value less costs to sell. This statement is effective for fiscal
years beginning after December 15, 1995. The adoption of this statement has not
had a material effect on the financial statements.
N. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year presentation.
2. SIGNIFICANT TRANSACTIONS
On February 19, 1997, AFC and Allmerica P&C entered into an Agreement and Plan
of Merger (the "Merger Agreement") pursuant to which AFC will acquire all of the
outstanding Common Stock, $1.00 par value per share, of Allmerica P&C that it
does not already own for consideration consisting of $33.00 per share of Common
Stock, subject to adjustment, payable in cash and shares of common stock, par
value $0.01 per share, AFC (the "AFC Common Stock"). In addition, a shareholder
of Allmerica P&C may elect to receive the consideration in cash, without
interest, or in shares of AFC Common Stock, subject to proration as set forth in
the Merger Agreement. The maximum number of shares of AFC Common Stock to be
issued in the Merger is approximately 9.67 million shares. The acquisition will
be accomplished by merging a newly-created, wholly-owned subsidiary of AFC with
and into Allmerica P&C (the "Merger"), resulting in Allmerica P&C becoming a
wholly-owned subsidiary of AFC. Also, immediately prior to the Merger, Allmerica
P&C's Certificate of Incorporation will be amended to authorize a new class of
Common Stock, one share of which will be exchanged for each share of Common
Stock currently held by SMA Financial Corp., a wholly-owned subsidiary of AFC.
The consummation of the Merger is subject to the satisfaction of various
conditions, including the approval of regulatory authorities.
On February 3, 1997, AFC Capital Trust (the "Trust"), a subsidiary business
trust of AFC, issued $300 million Series A Capital Securities, which pay
cumulative dividends at a rate of 8.207% semiannually commencing August 15,
1997. The Trust exists for the sole purpose of issuing the Capital Securities
and investing the proceeds thereof in an equivalent amount of 8.207% Junior
Subordinated Deferrable Interest Debentures due 2027 of AFC (the "Subordinated
Debentures"). Through certain guarantees, the Subordinated Debentures and the
terms of related agreements, AFC has irrevocably and unconditionally guaranteed
the obligations of the Trust under the Capital Securities. Net proceeds from the
offering of approximately $296.3 million are intended to fund a portion of the
acquisition of the 24.2 million publicly-held shares of Allmerica P&C pursuant
to an Agreement and Plan of Merger dated February 19, 1997.
Pursuant to the plan of reorganization effective October 16, 1995, AFC
issued 37.5 million shares of its common stock to eligible policyholders. AFC
also issued 12.6 million shares of its common stock at a price of $21.00 per
share in a public offering, resulting in net proceeds of $248.0 million, and
issued Senior Debentures in the principal amount of $200.0 million which
resulted in net proceeds of $197.2 million. AFC contributed $392.4 million of
these proceeds to FAFLIC.
Effective March 31, 1995, the Company entered into an agreement with TSSG, a
division of First Data Corporation, pursuant to which the Company sold its
mutual fund processing business and agreed not to engage in this business for
four years after that date. In accordance with this agreement, the Company
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
received proceeds of $32.1 million. A gain of $13.5 million, net of taxes of
$7.2 million, was recorded in March 1995. Additionally, the Company received a
non-recurring $3.1 million contingent payment, net of taxes of $1.7 million, in
1996, related to the aforementioned sale.
3. INVESTMENTS
A. SUMMARY OF INVESTMENTS
The Company accounts for its investments, all of which are classified as
available-for-sale, in accordance with SFAS No. 115. The amortized cost and fair
value of available-for-sale fixed maturities and equity securities were as
follows:
<TABLE>
<CAPTION>
1996
-----------------------------------------------
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....... $ 273.6 $ 9.3 $ 1.6 $ 281.3
States and political subdivisions....... 2,236.9 48.5 7.7 2,277.7
Foreign governments..................... 108.0 7.3 -- 115.3
Corporate fixed maturities.............. 4,277.5 140.3 15.7 4,402.1
Mortgage-backed securities.............. 383.1 4.7 2.7 385.1
--------- ---------- ----------- --------
Total fixed maturities.................. $7,279.1 $210.1 $ 27.7 $7,461.5
--------- ---------- ----------- --------
--------- ---------- ----------- --------
Equity securities....................... $ 327.9 $148.9 $ 3.7 $ 473.1
--------- ---------- ----------- --------
--------- ---------- ----------- --------
<CAPTION>
1995
-----------------------------------------------
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....... $ 377.0 $ 21.0 -- $ 398.0
States and political subdivisions....... 2,110.6 60.7 4.0 2,167.3
Foreign governments..................... 60.6 3.4 0.6 63.4
Corporate fixed maturities.............. 4,582.1 200.8 16.4 4,766.5
Mortgage-backed securities.............. 337.6 8.6 2.1 344.1
--------- ---------- ----------- --------
Total fixed maturities.................. $7,467.9 $294.5 $ 23.1 $7,739.3
--------- ---------- ----------- --------
--------- ---------- ----------- --------
Equity securities....................... $ 410.6 $111.7 $ 5.1 $ 517.2
--------- ---------- ----------- --------
--------- ---------- ----------- --------
</TABLE>
(1) Amortized cost for fixed maturities and cost for equity securities.
In March 1994, AFLIAC voluntarily withdrew its license in New York in order
to provide for certain commission arrangements prohibited by New York comparable
to AFLIAC's competitors. In connection with the withdrawal, FAFLIC, which is
licensed in New York, became qualified to sell the products previously sold by
AFLIAC 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 general
account liabilities of AFLIAC for New York policyholders, claimants and
creditors. At December 31, 1996, the amortized cost and market value of assets
on deposit were $284.9 million and $292.2 million, respectively. At December 31,
1995, the amortized cost and market value of assets on deposit were $295.0
million and $303.6 million, respectively. In addition, fixed maturities,
excluding those securities on deposit in New York, with an amortized cost of
$98.0 million and $82.2 million were on deposit with various state and
governmental authorities at December 31, 1996 and 1995, respectively.
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
There were no contractual fixed maturity investment commitments at December
31, 1996 and 1995, respectively.
The amortized cost and fair value by maturity periods for fixed maturities
are shown below. Actual maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties, or the Company may have the right to put
or sell the obligations back to the issuers. Mortgage backed securities are
included in the category representing their ultimate maturity.
<TABLE>
<CAPTION>
1996
--------------------
DECEMBER 31 AMORTIZED FAIR
(IN MILLIONS) COST VALUE
- ---------------------------------------- --------- --------
<S> <C> <C>
Due in one year or less................. $ 567.1 $ 570.7
Due after one year through five years... 2,216.4 2,297.2
Due after five years through ten
years.................................. 2,373.1 2,432.0
Due after ten years..................... 2,122.5 2,161.6
--------- --------
Total............................... $7,279.1 $7,461.5
--------- --------
--------- --------
</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>
1996
Fixed maturities............................. $2,432.8 $19.3 $30.5
-------- ----- ------
Equity securities............................ $ 228.1 $56.1 $ 1.3
-------- ----- ------
1995
Fixed maturities............................. $1,612.3 $23.7 $33.0
-------- ----- ------
Equity securities............................ $ 122.2 $23.1 $ 6.9
-------- ----- ------
1994
Fixed maturities............................. $1,026.2 $12.6 $21.6
-------- ----- ------
Equity securities............................ $ 124.3 $17.4 $ 4.5
-------- ----- ------
</TABLE>
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Unrealized gains and losses on available-for-sale and other securities, are
summarized as follows:
<TABLE>
<CAPTION>
EQUITY
SECURITIES
FOR THE YEARS ENDED DECEMBER 31 FIXED AND OTHER
(IN MILLIONS) MATURITIES (1) TOTAL
- ------------------------------------------------------------ ---------- ----------- -------
<S> <C> <C> <C>
1996
Net appreciation, beginning of year......................... $108.7 $ 44.3 $ 153.0
---------- ----------- -------
Net (depreciation) appreciation on available-for-sale
fixed maturities......................................... (94.1) 35.9 (58.2)
Net appreciation from the effect on deferred policy
acquisition costs and on policy liabilities.............. 23.1 -- 23.1
Provision for deferred federal income taxes and minority
interest................................................. 33.6 (20.1) 13.5
---------- ----------- -------
(37.4) 15.8 (21.6)
---------- ----------- -------
Net appreciation, end of year............................... $ 71.3 $ 60.1 $ 131.4
---------- ----------- -------
---------- ----------- -------
1995
Net appreciation (depreciation), beginning of year.......... $(89.4) $ 10.4 $ (79.0)
---------- ----------- -------
Effect of transfer of securities between classifications:
Net appreciation on available-for-sale fixed maturities... 29.2 -- 29.2
Effect of transfer on deferred policy acquisition costs
and on policy liabilities................................ (6.8) -- (6.8)
Provision for deferred federal income taxes and minority
interest................................................. (9.6) -- (9.6)
---------- ----------- -------
12.8 -- 12.8
---------- ----------- -------
Net appreciation on available-for-sale securities........... 465.4 87.5 552.9
Net depreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ (86.9) (86.9)
Provision for deferred federal income taxes and minority
interest................................................... (193.2) (53.6) (246.8)
---------- ----------- -------
185.3 33.9 219.2
---------- ----------- -------
Net appreciation, end of year............................... $108.7 $ 44.3 $ 153.0
---------- ----------- -------
---------- ----------- -------
1994
Net appreciation, beginning of year......................... $-- $ 17.5 $ 17.5
---------- ----------- -------
Cumulative effect of accounting change:
Net appreciation on available-for-sale fixed maturities... 335.3 -- 335.3
Net depreciation from the effect of accounting change on
deferred policy acquisition costs and on policy
liabilities.............................................. (39.2) -- (39.2)
Provision for deferred federal income taxes and minority
interest................................................. (149.1) -- (149.1)
---------- ----------- -------
147.0 -- 147.0
---------- ----------- -------
Net depreciation on available-for-sale securities........... (547.9) (17.4) (565.3)
Net appreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ 73.2 -- 73.2
Provision for deferred federal income taxes and minority
interest................................................... 238.3 10.3 248.6
---------- ----------- -------
(236.4) (7.1) (243.5)
---------- ----------- -------
Net (depreciation) appreciation, end of year................ $(89.4) $ 10.4 $ (79.0)
---------- ----------- -------
---------- ----------- -------
</TABLE>
(1) Includes net appreciation on other investments of $0.6 million, 2.2
million, and $0.6 million in 1996, 1995, and 1994, respectively.
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
B. MORTGAGE LOANS AND REAL ESTATE
FAFLIC's mortgage loans and real estate are diversified by property type and
location. Real estate investments have been obtained primarily through
foreclosure. Mortgage loans are collateralized by the related properties and
generally are no more than 75% of the property's value at the time the original
loan is made.
The carrying values of mortgage loans and real estate investments net of
applicable reserves were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1996 1995
- ---------------------------------------- ------ --------
<S> <C> <C>
Mortgage loans.......................... $650.1 $ 799.5
------ --------
Real estate:
Held for sale......................... 110.4 168.9
Held for production of income......... 10.3 10.7
------ --------
Total real estate................... 120.7 179.6
------ --------
Total mortgage loans and real estate.... $770.8 $ 979.1
------ --------
------ --------
</TABLE>
Reserves for mortgage loans were $19.6 million and $33.8 million at December
31, 1996 and 1995, respectively.
During 1996, 1995 and 1994, non-cash investing activities included real
estate acquired through foreclosure of mortgage loans, which had a fair value of
$0.9 million, $26.1 million and $39.2 million, respectively.
At December 31, 1996, contractual commitments to extend credit under
commercial mortgage loan agreements amounted to approximately $22.1 million, of
which $3.1 million related to the Closed Block. These commitments generally
expire within one year.
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Mortgage loans and real estate investments comprised the following property
types and geographic regions:
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1996 1995
- ---------------------------------------- ------ --------
<S> <C> <C>
Property type:
Office building....................... $317.1 $ 435.9
Residential........................... 95.4 145.3
Retail................................ 177.0 205.6
Industrial / warehouse................ 124.8 93.8
Other................................. 91.0 151.9
Valuation allowances.................. (34.5) (53.4)
------ --------
Total................................... $770.8 $ 979.1
------ --------
------ --------
Geographic region:
South Atlantic........................ 227.0 $ 281.4
Pacific............................... 154.4 191.9
East North Central.................... 119.2 118.2
Middle Atlantic....................... 112.6 148.9
West South Central.................... 41.6 79.7
New England........................... 50.9 94.9
Other................................. 99.6 117.5
Valuation allowances.................. (34.5) (53.4)
------ --------
Total................................... $770.8 $ 979.1
------ --------
------ --------
</TABLE>
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
At December 31, 1996, scheduled mortgage loan maturities were as follows:
1997 -- $131.9 million; 1998 -- $161.7 million; 1999 -- $99.9 million; 2000 --
$138.0 million; 2001 -- $34.4 million; and $84.2 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 1996, the Company refinanced $7.8 million of mortgage
loans based on terms which differed from those granted to new borrowers.
C. INVESTMENT VALUATION ALLOWANCES
Investment valuation allowances which have been deducted in arriving at
investment carrying values as presented in the consolidated balance sheets and
changes thereto are shown below.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED BALANCE AT
DECEMBER 31 BALANCE AT DECEMBER
(IN MILLIONS) JANUARY 1 ADDITIONS DEDUCTIONS 31
- ------------------------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
1996
Mortgage loans........... $33.8 $ 5.5 $19.7 $19.6
Real estate.............. 19.6 -- 4.7 14.9
----- --------- ----- -----
Total................ $53.4 $ 5.5 $24.4 $34.5
----- --------- ----- -----
----- --------- ----- -----
1995
Mortgage loans........... $47.2 $ 1.5 $14.9 $33.8
Real estate.............. 22.9 (0.6) 2.7 19.6
----- --------- ----- -----
Total................ $70.1 $ 0.9 $17.6 $53.4
----- --------- ----- -----
----- --------- ----- -----
1994
Mortgage loans........... $73.8 $14.6 $41.2 $47.2
Real estate.............. 21.0 3.2 1.3 22.9
----- --------- ----- -----
Total................ $94.8 $17.8 $42.5 $70.1
----- --------- ----- -----
----- --------- ----- -----
</TABLE>
The carrying value of impaired loans was $33.6 million and $55.7 million,
with related reserves of $11.9 million and $22.3 million as of December 31, 1996
and 1995, respectively. All impaired loans were reserved as of December 31, 1996
and 1995.
The average carrying value of impaired loans was $50.4 million, $117.9
million and $155.5 million, with related interest income while such loans were
impaired of $5.8 million, $9.3 million and $12.4 million as of December 31,
1996, 1995 and 1994 respectively.
D. FUTURES CONTRACTS
FAFLIC purchases long futures contracts and sells short futures contracts on
margin to hedge against interest rate fluctuations and their effect on the net
cash flows from the sales of guaranteed investment contracts. The notional
amount of such futures contracts outstanding were $(33.0) million net short and
$74.7 million long contracts at December 31, 1996 and 1995, respectively.
Because the Company purchases and sells futures contracts through brokers who
assume the risk of loss, the Company's exposure to credit risk under futures
contracts is limited to the margin deposited with the broker. The maturity of
all futures contracts outstanding are less than one year. The fair value of
futures contracts outstanding were $(32.4) million and $75.7 million at December
31, 1996 and 1995, respectively.
Gains and losses on hedge contracts related to interest rate fluctuations
are deferred and recognized in income over the period being hedged corresponding
to related guaranteed investment contracts. Deferred hedging gains (losses) were
$0.5 million, $5.6 million, and $(7.7) million in 1996, 1995 and 1994,
respectively. Gains and losses on hedge contracts that are deemed ineffective by
management are realized immediately.
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
A reconciliation of the notional amount of futures contracts is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1996 1995 1994
- --------------------------------------------- ------ ------ ------
<S> <C> <C> <C>
Contracts outstanding, beginning of year..... $ 74.7 $126.6 $141.7
New contracts................................ (1.1) 349.2 816.0
Contracts terminated......................... (106.6) (401.1) (831.1)
------ ------ ------
Contracts outstanding, end of year........... $(33.0) $ 74.7 $126.6
------ ------ ------
------ ------ ------
</TABLE>
E. FOREIGN CURRENCY SWAP CONTRACTS
The Company enters into foreign currency swap contracts to hedge exposure to
currency risk on foreign fixed maturity investments. Interest and principal
related to foreign fixed maturity investments payable in foreign currencies, at
current exchange rates, are exchanged for the equivalent payment translated at a
specific currency exchange rate. The Company's maximum exposure to counterparty
credit risk is the difference between the foreign currency exchange rate, as
agreed upon in the swap contract, and the foreign currency spot rate on the date
of the exchange. The fair values of the foreign currency swap contracts
outstanding were $(9.2) million and $(1.8) million at December 31, 1996 and
1995, respectively.
The difference between amounts paid and received on foreign currency swap
contracts is reflected in the net investment income related to the underlying
assets and is not material in 1996, 1995 and 1994. The Company had no deferred
gains or losses on foreign currency swap contracts.
A reconciliation of the notional amount of swap contracts is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1996 1995 1994
- --------------------------------------------- ------ ------ ------
<S> <C> <C> <C>
Contracts outstanding, beginning of year..... $104.6 $118.7 $128.8
New contracts................................ -- -- 10.1
Contracts expired............................ (36.0) -- (15.1)
Contracts terminated......................... -- (14.1) (5.1)
------ ------ ------
Contracts outstanding, end of year........... $ 68.6 $104.6 $118.7
------ ------ ------
------ ------ ------
</TABLE>
Expected maturities of foreign currency swap contracts are $18.2 million in
1997 and $50.4 million in 1999 and thereafter. There are no expected maturities
of foreign currency swap contracts in 1998.
F. INTEREST RATE AND OTHER SWAP CONTRACTS
The Company enters into interest rate swap contracts to hedge exposure to
interest rate fluctuations. Under these swap contracts, the Company agrees to
exchange, at specified intervals, the difference between fixed and floating
interest amounts calculated on an agreed-upon notional principal amount. In
addition, the Company has entered into two new types of swap contracts in 1996:
security return-linked swap contracts and insurance portfolio-linked swap
contracts for investment purposes. Under the security return-linked contracts,
the Company agrees to exchange cash flows according to the performance of a
specified security or portfolio of securities. Under the insurance
portfolio-linked swap contracts, the Company agrees to exchange cash flows
according to the performance of a specified underwriter's portfolio of insurance
business. Because the underlying principal of swap contracts is not exchanged,
the Company's maximum exposure to counterparty credit risk is the difference in
payments exchanged.
The net amount receivable or payable is recognized over the life of the swap
contract as an adjustment to net investment income. The increase or (decrease)
in net investment income related to interest rate and other swap contracts was
$0.6 million, $0.7 million and $(1.3) million for the years ended December 31,
1996,
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
1995 and 1994, respectively. The Company had no deferred gains or losses
relating to interest rate and other swap contracts. The fair values of interest
rate and other swap contracts outstanding were $0.1 million, $0.4 million and
$0.6 million for the years ended December 31, 1996, 1995 and 1994, respectively.
A reconciliation of the notional amount of interest rate and other swap
contracts is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1996 1995 1994
- --------------------------------------------- ------ ------ ------
<S> <C> <C> <C>
Contracts outstanding, beginning of year..... $ 17.5 $ 22.8 $ 22.8
New contracts................................ 63.6 -- --
Contracts expired............................ (17.5) (5.3) --
------ ------ ------
Contracts outstanding, end of year........... $ 63.6 $ 17.5 $ 22.8
------ ------ ------
------ ------ ------
</TABLE>
Expected maturities of interest rate and other swap contracts outstanding at
December 31 are as follows: $43.6 million in 1997, $5.0 million in 1998, and
$15.0 million in 1999 and thereafter.
G. OTHER
At December 31, 1996, FAFLIC had no concentration of investments in a single
investee exceeding 10% of shareholder's equity, except for investments with the
U.S. Treasury with a carrying value of $262.8 million.
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) 1996 1995 1994
- --------------------------------------------- ------ ------ ------
<S> <C> <C> <C>
Fixed maturities............................. $553.8 $555.1 $578.3
Mortgage loans............................... 69.5 97.0 119.9
Equity securities............................ 11.1 13.2 9.9
Policy loans................................. 10.3 20.3 23.3
Real estate.................................. 40.8 48.7 44.6
Other long-term investments.................. 19.0 7.1 5.7
Short-term investments....................... 10.6 21.2 10.3
------ ------ ------
Gross investment income...................... 715.1 762.6 792.0
Less investment expenses..................... (45.2) (52.5) (48.9)
------ ------ ------
Net investment income........................ $669.9 $710.1 $743.1
------ ------ ------
------ ------ ------
</TABLE>
At December 31, 1996, fixed maturities and mortgage loans on non-accrual
status were $2.0 million and $6.8 million, including restructured loans of $4.4
million. The effect of non-accruals, compared with amounts that would have been
recognized in accordance with the original terms of the investments, was to
reduce net income by $0.5 million, $0.6 million and $5.1 million in 1996, 1995
and 1994, respectively.
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 $51.3 million, $98.9 million and $126.8 million at December
31, 1996, 1995 and 1994, respectively. Interest income on restructured mortgage
loans that would have been recorded in accordance with the original terms of
such loans amounted to $7.7 million, $11.1 million and $14.4 million in 1996,
1995 and 1994, respectively. Actual interest income on these loans included in
net investment income aggregated $4.5 million, $7.1 million and $8.2 million in
1996, 1995 and 1994, respectively.
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
At December 31, 1996, fixed maturities with a carrying value of $2.0 million
were non-income producing for the twelve months ended December 31, 1996. There
were no mortgage loans which were non-income producing for the twelve months
ended December 31, 1996.
Included in long-term investments is income from limited partnerships of
$13.7 million, $0.1 million and $0.6 million in 1996, 1995 and 1994,
respectively.
B. REALIZED INVESTMENT GAINS AND LOSSES
Realized gains (losses) on investments were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1996 1995 1994
- --------------------------------------------- ------ ------ ------
<S> <C> <C> <C>
Fixed maturities............................. $ (9.7) $ (7.0) $ 2.4
Mortgage loans............................... (2.4) 1.4 (12.1)
Equity securities............................ 54.8 16.2 12.4
Real estate.................................. 21.1 5.3 1.4
Other........................................ 3.0 3.2 (3.0)
------ ------ ------
Net realized investment gains................ $ 66.8 $ 19.1 $ 1.1
------ ------ ------
------ ------ ------
</TABLE>
Proceeds from voluntary sales of investments in fixed maturities were
$2,432.8 million, $1,612.3 million and $1,036.5 million in 1996, 1995 and 1994,
respectively. Realized gains on such sales were $19.3 million, $23.7 million and
$12.9 million; and realized losses were $30.5 million, $33.0 million and $21.6
million for 1996, 1995 and 1994, respectively.
5. FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS
SFAS 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. Fair values of
interest rate futures were not material at December 31, 1996 and 1995.
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-20
<PAGE>
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 consolidated balance sheets approximates
fair value since policy loans have no defined maturity dates and are inseparable
from the insurance contracts.
REINSURANCE RECEIVABLES
The carrying amount reported in the consolidated balance sheets approximates
fair value.
INVESTMENT CONTRACTS (WITHOUT MORTALITY FEATURES)
Fair values for the Company's liabilities under guaranteed investment type
contracts are estimated using discounted cash flow calculations using current
interest rates for similar contracts with maturities consistent with those
remaining for the contracts being valued. Other liabilities are based on
surrender values.
DEBT
The carrying value of short-term debt reported in the balance sheet approximates
fair value. The fair value of long-term debt was estimated using market quotes,
when available, and, when not available, discounted cash flow analyses.
The estimated fair values of the financial instruments were as follows:
<TABLE>
<CAPTION>
1996 1995
-------------------- --------------------
DECEMBER 31 CARRYING FAIR CARRYING FAIR
(IN MILLIONS) VALUE VALUE VALUE VALUE
- --------------------------------------------- --------- -------- --------- --------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents.................. $ 175.9 $ 175.9 $ 236.6 $ 236.6
Fixed maturities........................... 7,461.5 7,461.5 7,739.3 7,739.3
Equity securities.......................... 473.1 473.1 517.2 517.2
Mortgage loans............................. 650.1 675.7 799.5 845.4
Policy loans............................... 132.4 132.4 123.2 123.2
--------- -------- --------- --------
$ 8,893.0 $8,918.6 $ 9,415.8 $9,461.7
--------- -------- --------- --------
--------- -------- --------- --------
FINANCIAL LIABILITIES
Guaranteed investment contracts............ $ 1,101.3 $1,119.2 $ 1,632.8 $1,677.0
Supplemental contracts without life
contingencies............................. 23.1 23.1 24.4 24.4
Dividend accumulations..................... 87.3 87.3 86.2 86.2
Other individual contract deposit funds.... 76.9 74.3 95.7 92.8
Other group contract deposit funds......... 789.1 788.3 894.0 902.8
Individual annuity contracts............... 935.6 719.0 966.3 810.0
Short-term debt............................ 38.4 38.4 28.0 28.0
Long-term debt............................. 2.7 2.7 2.8 2.9
--------- -------- --------- --------
$ 3,054.4 $2,852.3 $ 3,730.2 $3,624.1
--------- -------- --------- --------
--------- -------- --------- --------
</TABLE>
F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
6. CLOSED BLOCK
Included in other income in the Consolidated Statement of Income in 1996 and
1995 is a net pre-tax contribution from the Closed Block of $8.6 million and
$2.9 million, respectively. Summarized financial information of the Closed Block
as of December 31, 1996 and 1995 and for the period ended December 31, 1996, and
the period from October 1, 1995 through December 31, 1995, is as follows:
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1996 1995
- ----------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Assets
Fixed maturities, at fair value (amortized cost of $397.2 and $447.4, respectively).......... $ 403.9 $ 458.0
Mortgage loans............................................................................... 114.5 57.1
Policy loans................................................................................. 230.2 242.4
Cash and cash equivalents.................................................................... 24.1 17.6
Accrued investment income.................................................................... 14.3 16.6
Deferred policy acquisition costs............................................................ 21.1 24.5
Other assets................................................................................. 3.7 2.7
--------- ---------
Total assets................................................................................... $ 811.8 $ 818.9
--------- ---------
--------- ---------
Liabilities
Policy liabilities and accruals.............................................................. $ 883.4 $ 899.2
Other liabilities............................................................................ 8.7 2.8
--------- ---------
Total liabilities.............................................................................. $ 892.1 $ 902.0
--------- ---------
--------- ---------
</TABLE>
F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 31, DECEMBER 31, OCTOBER 1 THROUGH
(IN MILLIONS) 1996 DECEMBER 31, 1995
- -------------------------------------------------------------------------------- ------------ -----------------
<S> <C> <C>
Revenues
Premiums...................................................................... $ 61.7 $ 11.5
Net investment income......................................................... 52.6 12.8
Realized investment loss...................................................... (0.7) --
------------ -------
Total revenues.................................................................. 113.6 24.3
------------ -------
Benefits and expenses
Policy benefits............................................................... 101.2 20.6
Policy acquisition expenses................................................... 3.2 0.8
Other operating expenses...................................................... 0.6 --
------------ -------
Total benefits and expenses..................................................... 105.0 21.4
------------ -------
Contribution from the Closed Block.............................................. $ 8.6 $ 2.9
------------ -------
------------ -------
Cash flows
Cash flows from operating activities:
Contribution from the Closed Block.......................................... $ 8.6 $ 2.9
Initial cash transferred to the Closed Block................................ -- 139.7
Change in deferred policy acquisition costs, net............................ 3.4 0.4
Change in premiums and other receivables.................................... 0.2 (0.1)
Change in policy liabilities and accruals................................... (13.9) 2.0
Change in accrued investment income......................................... 2.3 (1.3)
Other, net.................................................................. 2.5 0.8
------------ -------
Net cash provided by operating activities....................................... 3.1 144.4
------------ -------
Cash flows from investing activities:
Sales, maturities and repayments of investments............................. 188.1 29.0
Purchases of investments.................................................... (196.9) (158.8)
Other, net.................................................................. 12.2 3.0
------------ -------
Net cash provided by (used in) investing activities............................. 3.4 (126.8)
------------ -------
Net increase in cash and cash equivalents....................................... 6.5 17.6
Cash and cash equivalents, beginning of year.................................... 17.6 --
------------ -------
Cash and cash equivalents, end of year.......................................... $ 24.1 $ 17.6
------------ -------
------------ -------
</TABLE>
On October 16, 1995, there were no valuation allowances transferred to the
Closed Block on mortgage loans. There are no valuation allowances on mortgage
loans in the Closed Block at December 31, 1996 or 1995, respectively.
Many expenses related to Closed Block operations are charged to operations
outside the Closed Block; accordingly, the contribution from the Closed Block
does not represent the actual profitability of the Closed Block operations.
Operating costs and expenses outside of the Closed Block are, therefore,
disproportionate to the business outside the Closed Block.
F-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
7. DEBT
Short- and long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1996 1995
- ------------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Short-Term
Commercial paper............................................................................... $ 37.8 $ 27.7
Other.......................................................................................... 0.6 0.3
--------- ---------
Total short-term debt............................................................................ $ 38.4 $ 28.0
--------- ---------
--------- ---------
Long-term debt................................................................................... $ 2.7 $ 2.8
--------- ---------
--------- ---------
</TABLE>
FAFLIC issues commercial paper primarily to manage imbalances between
operating cash flows and existing commitments. Commercial paper borrowing
arrangements are supported by various lines of credit. At December 31, 1996, the
weighted average interest rate for outstanding commercial paper was
approximately 5.5%.
At December 31, 1996, FAFLIC had approximately $140.0 million in committed
lines of credit provided by U.S. banks, of which $102.2 million was available
for borrowing. These lines of credit generally have terms of less than one year,
and require the Company to pay annual commitment fees of 0.07% of the available
credit. Interest that would be charged for usage of these lines of credit is
based upon negotiated arrangements.
During 1996, the Company utilized repurchase agreements to finance certain
investments. Although the repurchase agreements were entirely settled by year
end, management may utilize this policy again in future periods.
In October, 1995, AFC issued $200.0 million face amount of Senior Debentures
for proceeds of $197.2 million net of discounts and issuance costs. These
securities have an effective interest rate of 7.65%, and mature on October 16,
2025. Interest is payable semiannually on October 15 and April 15 of each year.
The Senior Debentures are subject to certain restrictive covenants, including
limitations on issuance of or disposition of stock of restricted subsidiaries
and limitations on liens. AFC is in compliance with all covenants. The primary
source of cash for repayment of the debt by AFC is dividends from FAFLIC.
Interest expense was $16.8 million, $4.1 million and $4.3 million in 1996,
1995 and 1994, respectively. Interest expense included $11.0 million related to
interest payments on repurchase agreements. All interest expense is recorded in
other operating expenses.
8. FEDERAL INCOME TAXES
Provisions for federal income taxes have been calculated in accordance with the
provisions of SFAS No. 109. A summary of the federal income tax expense
(benefit) in the consolidated statements of income is shown below:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1996 1995 1994
- -------------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Federal income tax expense (benefit)
Current............................................................................. $ 96.8 $ 119.7 $ 45.4
Deferred............................................................................ (15.7) (37.0) 8.0
--------- --------- ---------
Total................................................................................. $ 81.1 $ 82.7 $ 53.4
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The federal income taxes attributable to the consolidated results of
operations are different from the amounts determined by multiplying income
before federal income taxes by the expected federal income tax rate. The sources
of the difference and the tax effects of each were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1996 1995 1994
- ------------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Expected federal income tax expense.................................................. $ 122.3 $ 105.6 $ 53.7
Tax-exempt interest................................................................ (35.3) (32.2) (35.9)
Differential earnings amount....................................................... (10.2) (7.6) 35.0
Dividend received deduction........................................................ (1.6) (4.0) (2.5)
Changes in tax reserve estimates................................................... 4.7 19.3 4.0
Other, net......................................................................... 1.2 1.6 (0.9)
--------- --------- ---------
Federal income tax expense........................................................... $ 81.1 $ 82.7 $ 53.4
--------- --------- ---------
--------- --------- ---------
</TABLE>
Until conversion to a stock life insurance company, FAFLIC, as a mutual
company, reduced its deduction for policyholder dividends by the differential
earnings amount. This amount was computed, for each tax year, by multiplying the
average equity base of the FAFLIC/AFLIAC consolidated group, as determined for
tax purposes, by the estimate of an excess of an imputed earnings rate over the
average mutual life insurance companies' earnings rate. The differential
earnings amount for each tax year was subsequently recomputed when actual
earnings rates were published by the Internal Revenue Service (IRS). The
differential earnings amount included in 1996 related to an adjustment for the
1994 tax year based on the actual mutual life insurance companies' earnings rate
issued by the IRS in 1996. As a stock life company, FAFLIC is no longer required
to reduce its policyholder dividend deduction by the differential earnings
amount.
The deferred income tax asset represents the tax effects of temporary
differences attributable to Allmerica P&C, a separate consolidated group for
federal tax return purposes. Its components were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1996 1995
- --------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Deferred tax (assets) liabilities
AMT carryforwards.......................................................................... $ (16.3) $ (9.8)
Loss reserve discounting................................................................... (182.1) (178.3)
Deferred acquisition costs................................................................. 57.5 55.1
Employee benefit plans..................................................................... (25.1) (25.5)
Investments, net........................................................................... 73.4 77.4
Bad debt reserve........................................................................... (1.7) (1.8)
Other, net................................................................................. 1.1 1.7
--------- ---------
Deferred tax asset, net...................................................................... $ (93.2) $ (81.2)
--------- ---------
--------- ---------
</TABLE>
F-25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The deferred income tax liability represents the tax effects of temporary
differences attributable to the FAFLIC/AFLIAC consolidated federal tax return
group. Its components were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1996 1995
- --------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Deferred tax (assets) liabilities
Loss reserve discounting................................................................... $ (153.7) $ (129.1)
Deferred acquisition costs................................................................. 189.6 169.7
Employee benefit plans..................................................................... (16.3) (14.6)
Investments, net........................................................................... 55.1 67.0
Bad debt reserve........................................................................... (24.5) (26.3)
Other, net................................................................................. (15.6) (18.9)
--------- ---------
Deferred tax liability, net.................................................................. $ 34.6 $ 47.8
--------- ---------
--------- ---------
</TABLE>
Gross deferred income tax assets totaled $435.3 million and $405.1 million
at December 31, 1996 and 1995, respectively. Gross deferred income tax
liabilities totaled $376.7 million and $371.7 million at December 31, 1996 and
1995, respectively.
Management believes, based on the Company's 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, management considered the future reversal of its existing
temporary differences and available tax planning strategies that could be
implemented, if necessary.
At December 31, 1996, there are available non-life net operating loss
carryforwards of $0.8 million, and alternative minimum tax credit carryforwards
of $16.3 million.
The Company's federal income tax returns are routinely audited by the IRS,
and provisions are routinely made in the financial statements in anticipation of
the results of these audits. The IRS has examined the FAFLIC/AFLIAC consolidated
group's federal income tax returns through 1991. The IRS has also examined the
Allmerica P&C consolidated group's federal income tax returns through 1991. The
Company is currently considering its response to certain adjustments proposed by
the IRS with respect to the federal income tax returns for 1989, 1990 and 1991
for both the FAFLIC/AFLIAC consolidated group, as well as the Allmerica P&C
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 management's opinion, adequate tax liabilities have been
established for all years. However, the amount of these tax liabilities could be
revised in the near term if estimates of the Company's ultimate liability are
revised.
9. PENSION PLANS
FAFLIC provides retirement benefits to substantially all of its employees under
three separate defined benefit pension plans. Through December 31, 1994,
retirement benefits were based primarily on employees' years of service and
compensation during the highest five consecutive plan years of employment.
Benefits under this defined benefit formula were frozen for most employees (but
not for eligible agents) effective December 31, 1994. In their place, the
Company adopted a defined benefit cash balance formula, under which the Company
annually provides an allocation to each eligible employee as a percentage of
that employee's salary, similar to a defined contribution plan arrangement. The
1996 and 1995 allocations were based on 7.0% of each eligible employee's salary.
The Company's policy for the plans is to fund at least the minimum amount
required by the Employee Retirement Income Security Act of 1974.
F-26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Components of net pension expense were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1996 1995 1994
- -------------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Service cost -- benefits earned during the year....................................... $ 19.0 $ 19.7 $ 13.0
Interest accrued on projected benefit obligations..................................... 21.9 21.1 20.0
Actual return on assets............................................................... (42.2) (89.3) (2.6)
Net amortization and deferral......................................................... 9.3 66.1 (16.3)
--------- --------- ---------
Net pension expense................................................................... $ 8.0 $ 17.6 $ 14.1
--------- --------- ---------
--------- --------- ---------
</TABLE>
The following table summarizes the combined status of the three pension
plans. At December 31, 1996 the plans' assets exceeded their projected benefit
obligations and in 1995 the plans' projected benefit obligations exceeded their
assets.
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1996 1995
- ----------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation.................................................................... $ 308.9 $ 325.6
Unvested benefit obligation.................................................................. 6.6 5.0
--------- ---------
Accumulated benefit obligation................................................................. $ 315.5 $ 330.6
--------- ---------
--------- ---------
Pension liability included in Consolidated Balance Sheets:
Projected benefit obligation................................................................. $ 344.2 $ 367.1
Plan assets at fair value.................................................................... 347.8 321.2
--------- ---------
Plan assets greater (less) than projected benefit obligation............................... 3.6 (45.9)
Unrecognized net (gain) loss from past experience............................................ (9.1) 48.8
Unrecognized prior service benefit........................................................... (11.5) (13.8)
Unamortized transition asset................................................................. (24.7) (26.5)
--------- ---------
Net pension liability.......................................................................... $ (41.7) $ (37.4)
--------- ---------
--------- ---------
</TABLE>
Determination of the projected benefit obligations was based on a weighted
average discount rate of 7.0% in 1996 and 1995, and the assumed long-term rate
of return on plan assets was 9%. The actuarial present value of the projected
benefit obligations was determined using assumed rates of increase in future
compensation levels ranging from 5.5% to 6.5%. Plan assets are invested
primarily in various separate accounts and the general account of FAFLIC. The
plans also hold stock of AFC.
The Company has a profit sharing and 401(k) plan for its employees.
Effective for plan years beginning after 1994, the profit sharing formula for
employees has been discontinued and a 401(k) match feature has been added to the
continuing 401(k) plan for the employees. Total plan expense in 1996, 1995 and
1994 was $5.5 million, $5.2 million and $12.6 million, respectively. In addition
to this Plan, the Company has a defined contribution plan for substantially all
of its agents. The Plan expense in 1996, 1995 and 1994 was $2.0 million, $3.5
million and $2.7 million, respectively.
10. OTHER POSTRETIREMENT BENEFIT PLANS
In addition to the Company's pension plans, the Company currently provides
postretirement medical and death benefits to certain full-time employees and
dependents, under several plans sponsored by FAFLIC, Hanover and Citizens.
Generally, employees become eligible at age 55 with at least 15 years of
service. Spousal coverage is generally provided for up to two years after death
of the retiree. Benefits include hospital, major medical and a payment at death
equal to retirees' final compensation up to certain limits.
F-27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Effective January 1, 1996, the Company revised these benefits so as to establish
limits on future benefit payments and to restrict eligibility to current
employees. The medical plans have varying copayments and deductibles, depending
on the plan. These plans are unfunded.
The plan changes effective January 1, 1996 resulted in a negative plan
amendment (change in eligibility and medical benefits) of $26.8 million and
curtailment (no future increases in life insurance) of $5.3 million. The
negative plan amendment will be amortized as prior service cost over the average
number of years to full eligibility (approximately 9 years or $3.0 million per
year). Of the $5.3 million curtailment gain, $3.3 million has been deducted from
unrecognized loss and $2.0 million has been recorded as a reduction of the net
periodic postretirement benefit expense.
The plans' funded status reconciled with amounts recognized in the Company's
consolidated balance sheet were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1996 1995
- ---------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees.................................................................................... $ 40.4 $ 44.9
Fully eligible active plan participants..................................................... 7.5 14.0
Other active plan participants.............................................................. 24.4 45.9
--------- ---------
72.3 104.8
Plan assets at fair value..................................................................... -- --
--------- ---------
Accumulated postretirement benefit obligation in excess of plan assets........................ 72.3 104.8
Unrecognized prior service benefit............................................................ 23.8 --
Unrecognized loss............................................................................. (5.0) (13.4)
--------- ---------
Accrued postretirement benefit costs.......................................................... $ 91.1 $ 91.4
--------- ---------
--------- ---------
</TABLE>
The components of net periodic postretirement benefit expense were as
follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1996 1995 1994
- ---------------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Service cost............................................................................ $ 3.2 $ 4.2 $ 6.6
Interest cost........................................................................... 4.6 6.9 6.9
Amortization of (gain) loss............................................................. (2.8) (0.5) 1.4
--------- --------- ---------
Net periodic postretirement benefit expense............................................. $ 5.0 $ 10.6 $ 14.9
--------- --------- ---------
--------- --------- ---------
</TABLE>
For purposes of measuring the accumulated postretirement benefit obligation
at December 31, 1996, health care costs were assumed to increase 9.0% in 1997,
declining thereafter until the ultimate rate of 5.5% is reached in 2001 and
remains at that level thereafter. The health care cost trend rate assumption has
a significant effect on the amounts reported. For example, increasing the
assumed health care cost trend rates by one percentage point in each year would
increase the accumulated postretirement benefit obligation at December 31, 1996
by $5.3 million, and the aggregate of the service and interest cost components
of net periodic postretirement benefit expense for 1996 by $0.7 million.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.0% at December 31, 1996 and 1995.
F-28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
11. POSTEMPLOYMENT BENEFITS
Effective January 1, 1994, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 112, (SFAS No. 112), "Employers' Accounting
for Postemployment Benefits", which requires employers to recognize the costs
and obligations of severance, disability and related life insurance and health
care benefits to be paid to inactive or former employees after employment but
before retirement. Prior to adoption, the Company had recognized the cost of
these benefits on an accrual or paid basis, depending on the plan.
Implementation of SFAS No. 112 resulted in a transition obligation of $1.9
million, net of federal income taxes and minority interest, and is reported as a
cumulative effect of a change in accounting principle in the consolidated
statement of income. The impact of this accounting change, after recognition of
the cumulative effect, was not significant.
12. STOCK-BASED COMPENSATION PLANS
In October 1995 the FASB issued Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" (SFAS 123). The Standard is
effective for fiscal years beginning after December 15, 1995, and requires the
company either to apply a fair value measure to any stock-based compensation
granted by the company, or continue to apply the valuation provisions of
existing accounting standards, but with pro-forma net income and earnings per
share disclosures using a fair value methodology to value the stock-based
compensation. Beginning for the year ended December 31, 1996, AFC has elected to
continue to apply the valuation provisions of existing accounting standards (APB
25). The pro-forma effect of applying SFAS 123 is not material.
Effective June 17, 1996, AFC adopted a Long Term Stock Incentive Plan for
employees of AFC (the "Employees' Plan"). Key employees of AFC and its
subsidiaries are eligible for awards pursuant to the Plan administered by the
Compensation Committee of the Board of Directors (the "Committee") of AFC. Under
the terms of the Employees' Plan, options may be granted to eligible employees
at a price not less than the market price of AFC's common stock on the date of
grant. Option shares may be exercised subject to the terms prescribed by the
Committee at the time of grant, otherwise options vest at the rate of 20%
annually for five consecutive years and must be exercised not later than ten
years from the date of grant. At June 17, 1996, 231,500 option shares were
granted at an option price of $27.50. During 1996, 22,000 option shares were
forfeited leaving 209,500 option shares outstanding at December 31, 1996. There
were no options exercised during 1996. At December 31, 1996, there were no
options exercisable and 2,140,500 option shares were available for future grant.
13. DIVIDEND RESTRICTIONS
Massachusetts, Delaware, New Hampshire and Michigan have enacted laws governing
the payment of dividends to stockholders by insurers. These laws affect the
dividend paying ability of FAFLIC, AFLIAC, Hanover and Citizens, respectively.
Massachusetts' statute limits the dividends an insurer may pay in any twelve
month period, without the prior permission of the Commonwealth of Massachusetts
Insurance Commissioner, to the greater of (i) 10% of its statutory policyholder
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 for the preceding calendar year
(if such insurer is not a life company). In addition, under Massachusetts law,
no domestic insurer shall pay a dividend or make any distribution to its
shareholders from other than unassigned funds unless the Commissioner shall have
approved such dividend or distribution. At January 1, 1997, FAFLIC could pay
dividends of $151.8 million to AFC without prior approval of the Commissioner.
Dividends from FAFLIC to AFC will be the primary source of cash for
repayment of the debt by AFC and payment of dividends to AFC stockholders.
F-29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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. At January 1, 1997, AFLIAC could pay dividends of
$11.9 million to FAFLIC without prior approval.
Pursuant to New Hampshire's statute, the maximum dividends and other
distributions that an insurer may pay in any twelve month period, without the
prior approval of the New Hampshire Insurance Commissioner, is limited to 10% of
such insurer's statutory policyholder surplus as of the preceding December 31.
At January 1, 1997, the maximum dividend and other distributions that could be
paid to Allmerica P&C by Hanover, without prior approval of the Insurance
Commissioner, was approximately $15.4 million, which considers dividends
declared to Allmerica P&C of $105.0 million during 1996, including $80.0 million
which was declared in December. On January 2, 1997, Hanover declared an
extraordinary dividend in the amount of $120.0 million, payable on or after
January 21, 1997 to Allmerica P&C. The dividend, which was approved by the New
Hampshire Department on January 9, 1997, is to be paid in a lump sum or in such
installments as Allmerica P&C in its discretion may determine.
Pursuant to Michigan's statute, the maximum dividends and other
distributions that an insurer may pay in any twelve month period, without prior
approval of the Michigan Insurance Commissioner, is limited to the greater of
10% of policyholders' surplus as of December 31 of the immediately preceding
year or the statutory net income less realized gains, for the immediately
preceding calendar year. At January 1, 1997, Citizens Insurance could pay
dividends of $39.9 million to Citizens Corporation without prior approval.
14. SEGMENT INFORMATION
The Company offers financial products and services in two major areas: Risk
Management and Retirement and Asset Management. Within these broad areas, the
Company conducts business principally in five operating segments.
The Risk Management group includes two segments: Regional Property and
Casualty and Corporate Risk Management Services.
The Regional Property and Casualty segment includes property and casualty
insurance products, such as automobile insurance, homeowners insurance,
commercial multiple-peril insurance, and workers' compensation insurance. These
products are offered by Allmerica P&C through its operating subsidiaries,
Hanover and Citizens. Substantially all of the Regional Property and Casualty
segment's earnings are generated in Michigan and the Northeast (Connecticut,
Massachusetts, New York, New Jersey, New Hampshire, Rhode Island, Vermont and
Maine). The Corporate Risk Management Services segment includes group life and
health insurance products and services which assist employers in administering
employee benefit programs and in managing the related risks.
The Retirement and Asset Management group includes three segments: Retail
Financial Services, Institutional Services and Allmerica Asset Management. The
Retail Financial Services segment includes variable annuities, variable
universal life-type, traditional and health insurance products distributed via
retail channels to individuals across the country. The Institutional Services
segment includes primarily group retirement products such as 401(k) plans,
tax-sheltered annuities and GIC contracts which are distributed to institutions
across the country via work-site marketing and other arrangements. Allmerica
Asset Management is a Registered Investment Advisor which provides investment
advisory services primarily to affiliates and to other institutions, such as
insurance companies and pension plans.
F-30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Summarized below is financial information with respect to business segments
for the year ended and as of December 31.
<TABLE>
<CAPTION>
(IN MILLIONS) 1996 1995 1994
-------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Risk Management
Regional Property and Casualty.......... $ 2,193.7 $ 2,095.1 $ 2,004.8
Corporate Risk Management............... 361.5 328.5 302.4
---------- ---------- ----------
Subtotal.............................. 2,555.2 2,423.6 2,307.2
---------- ---------- ----------
Retirement and Asset Management
Retail Financial Services............... 450.9 486.7 507.9
Institutional Services.................. 266.7 330.2 397.9
Allmerica Asset Management.............. 8.8 4.4 4.0
---------- ---------- ----------
Subtotal.............................. 726.4 821.3 909.8
---------- ---------- ----------
Eliminations.............................. (8.7) (4.4) (21.9)
---------- ---------- ----------
Total....................................... $ 3,272.9 $ 3,240.5 $ 3,195.1
---------- ---------- ----------
---------- ---------- ----------
Income (loss) from continuing operations
before income taxes:
Risk Management
Regional Property and Casualty.......... $ 197.7 $ 206.3 $ 113.1
Corporate Risk Management............... 20.7 18.3 19.9
---------- ---------- ----------
Subtotal.............................. 218.4 224.6 133.0
---------- ---------- ----------
Retirement and Asset Management...........
Retail Financial Services............... 76.9 35.2 14.2
Institutional Services.................. 52.8 42.8 4.4
Allmerica Asset Management.............. 1.1 2.3 1.9
---------- ---------- ----------
Subtotal.............................. 130.8 80.3 20.5
---------- ---------- ----------
Total....................................... $ 349.2 $ 304.9 $ 153.5
---------- ---------- ----------
---------- ---------- ----------
Identifiable assets:
Risk Management
Regional Property and Casualty.......... $ 5,703.9 $ 5,741.8 $ 5,408.7
Corporate Risk Management............... 506.0 458.9 386.3
---------- ---------- ----------
Subtotal.............................. 6,209.9 6,200.7 5,795.0
---------- ---------- ----------
Retirement and Asset Management
Retail Financial Services............... 8,871.3 7,218.7 5,639.8
Institutional Services.................. 3,879.0 4,280.9 4,484.5
Allmerica Asset Management.............. 2.4 2.1 2.2
---------- ---------- ----------
Subtotal.............................. 12,752.7 11,501.7 10,126.5
---------- ---------- ----------
Total....................................... $18,962.6 $17,702.4 $15,921.5
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
15. LEASE COMMITMENTS
Rental expenses for operating leases, principally with respect to buildings,
amounted to $33.6 million, $36.4 million and $35.2 million in 1996, 1995 and
1994, respectively. At December 31, 1996, future minimum rental payments under
non-cancelable operating leases were approximately $71.7 million, payable as
follows: 1997 -- $26.4 million; 1998 -- $19.6 million; 1999 -- $12.8 million;
2000 -- $8.0 million; and $5.0 million thereafter.
F-31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
It is expected that in the normal course of business, leases that expire
will be renewed or replaced by leases on other property and equipment; thus, it
is anticipated that future minimum lease commitments will not be less than the
amounts shown for 1997.
16. REINSURANCE
In the normal course of business, the Company seeks to reduce the loss that may
arise from catastrophes or other 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 SFAS No. 113.
Amounts recoverable from reinsurers are estimated in a manner consistent
with the claim liability associated with the reinsured policy. Reinsurance
contracts do not relieve the Company from its obligations to policyholders.
Failure of reinsurers to honor their obligations could result in losses to the
Company; consequently, allowances are established for amounts deemed
uncollectible. The Company determines the appropriate amount of reinsurance
based on evaluation of the risks accepted and analyses prepared by consultants
and reinsurers and on market conditions (including the availability and pricing
of reinsurance). The Company also believes that the terms of its reinsurance
contracts are consistent with industry practice in that they contain standard
terms with respect to lines of business covered, limit and retention,
arbitration and occurrence. Based on its review of its reinsurers' financial
statements and reputations in the reinsurance marketplace, the Company believes
that its reinsurers are financially sound.
The Company is subject to concentration of risk with respect to reinsurance
ceded to various residual market mechanisms. As a condition to the ability to
conduct certain business in various states, the Company is required to
participate in various residual market mechanisms and pooling arrangements which
provide various insurance coverages to individuals or other entities that are
otherwise unable to purchase such coverage voluntarily provided by private
insurers.
These market mechanisms and pooling arrangements include the Massachusetts
Commonwealth Automobile Reinsurers ("CAR"), the Maine Workers' Compensation
Residual Market Pool ("MWCRP") and the Michigan Catastrophic Claims Association
("MCCA"). At December 31, 1996, the MCCA and CAR were the only two reinsurers
which represented 10% or more of the Company's reinsurance business. As a
servicing carrier in Massachusetts, the Company cedes a significant portion of
its private passenger and commercial automobile premiums to CAR. Net premiums
earned and losses and loss adjustment expenses ceded to CAR in 1996, 1995 and
1994 were $38.0 million and $21.8 million, $49.1 million and $33.7 million, and
$50.0 million and $29.8 million, respectively.
From 1988 through 1992, the Company was a servicing carrier in Maine, and
ceded a significant portion of its workers' compensation premiums to the Maine
Workers' Compensation Residual Market Pool, which is administered by The
National Council on Compensation Insurance ("NCCI"). The Company was involved in
legal proceedings regarding the MWCRP's deficit which through a legislated
settlement issued on June 23, 1995 provided for an initial funding of $220.0
million, of which the insurance carriers were responsible for $65.0 million.
Hanover paid its allocation of $4.2 million in December 1995. Some of the small
carriers are currently appealing this decision. The Company's right to recover
reinsurance balances for claims properly paid is not at issue in any such
proceedings. The Company expects to collect its reinsurance balance; however,
funding of the cash flow needs of the MWCRP may in the future be affected by
issues related to certain litigation, the outcome of which the Company cannot
predict. The Company ceded to MCCA net premiums earned and losses and loss
adjustment expenses in 1996, 1995 and 1994 of $50.5 million and $(52.9) million,
$66.8 million and $62.9 million, and $80.0 million and $24.2 million,
respectively. Because the MCCA is supported by assessments permitted by statute,
and all amounts billed by the Company to CAR, MWCRP and MCCA have been paid when
due, the Company believes that it has no significant exposure to uncollectible
reinsurance balances.
F-32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The effects of reinsurance were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1996 1995 1994
----------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Life insurance premiums:
Direct....................................... $ 389.1 $ 438.9 $ 447.2
Assumed...................................... 87.8 71.0 54.3
Ceded........................................ (138.9) (150.3) (111.0)
--------- --------- ---------
Net premiums................................... $ 338.0 $ 359.6 $ 390.5
--------- --------- ---------
--------- --------- ---------
Property and casualty premiums written:
Direct....................................... $2,039.7 $2,039.4 $1,992.4
Assumed...................................... 108.7 125.0 128.6
Ceded........................................ (234.0) (279.1) (298.1)
--------- --------- ---------
Net premiums................................... $1,914.4 $1,885.3 $1,822.9
--------- --------- ---------
--------- --------- ---------
Property and casualty premiums earned:
Direct....................................... $2,018.5 $2,021.7 $1,967.1
Assumed...................................... 112.4 137.7 116.1
Ceded........................................ (232.6) (296.2) (291.9)
--------- --------- ---------
Net premiums................................... $1,898.3 $1,863.2 $1,791.3
--------- --------- ---------
--------- --------- ---------
Life insurance and other individual policy
benefits, claims, losses and loss adjustment
expenses:
Direct....................................... $ 618.0 $ 749.6 $ 773.0
Assumed...................................... 44.9 38.5 28.9
Ceded........................................ (77.8) (69.5) (61.6)
--------- --------- ---------
Net policy benefits, claims, losses and loss
adjustment expenses........................... $ 585.1 $ 718.6 $ 740.3
--------- --------- ---------
--------- --------- ---------
Property and casualty benefits, claims, losses
and loss adjustment expenses:
Direct....................................... $1,288.3 $1,372.7 $1,364.4
Assumed...................................... 85.8 146.1 102.7
Ceded........................................ (2.2) (229.1) (160.4)
--------- --------- ---------
Net policy benefits, claims, losses and loss
adjustment expenses........................... $1,371.9 $1,289.7 $1,306.7
--------- --------- ---------
--------- --------- ---------
</TABLE>
17. DEFERRED POLICY ACQUISITION COSTS
The following reflects changes to the deferred policy acquisition asset:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1996 1995 1994
-------------------------------------------------- -------- -------- --------
<S> <C> <C> <C>
Balance at beginning of year...................... $ 735.7 $ 802.8 $ 746.9
Acquisition expenses deferred................... 560.8 504.8 510.3
Amortized to expense during the year............ (483.5) (470.3) (475.7)
Adjustment to equity during the year............ 9.7 (50.4) 21.3
Transferred to the Closed Block................. -- (24.8) --
Adjustment for cession of term life insurance... -- (26.4) --
-------- -------- --------
Balance at end of year............................ $ 822.7 $ 735.7 $ 802.8
-------- -------- --------
-------- -------- --------
</TABLE>
F-33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
18. LIABILITIES FOR OUTSTANDING CLAIMS, LOSSES AND LOSS ADJUSTMENT EXPENSES
The Company regularly updates its estimates of liabilities for outstanding
claims, losses and loss adjustment expenses as new information becomes available
and further events occur which may impact the resolution of unsettled claims for
its property and casualty and its accident and health lines of business. Changes
in prior estimates are reflected in results of operations in the year such
changes are determined to be needed and recorded.
The liability for future policy benefits and outstanding claims, losses and
loss adjustment expenses related to the Company's accident and health business
was $471.7 million, $446.9 million and $371.4 million at December 31, 1996, 1995
and 1994, respectively. Accident and health claim liabilities have been re-
estimated for all prior years and were increased by $0.6 million and $2.2
million in 1996 and 1994, respectively, and increased by $17.6 million in 1995.
Unfavorable development in the accident and health business during 1995 is
primarily due to reserve strengthening and adverse experience in the Company's
individual disability line of business
The following table provides a reconciliation of the beginning and ending
property and casualty reserve for unpaid losses and loss adjustment expenses
(LAE):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1996 1995 1994
----------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Reserve for losses and LAE, beginning of
year.......................................... $2,896.0 $2,821.7 $2,717.3
Incurred losses and LAE, net of reinsurance
recoverable:
Provision for insured events of the current
year........................................ 1,513.3 1,427.3 1,434.8
Decrease in provision for insured events of
prior years................................. (141.4) (137.6) (128.1)
--------- --------- ---------
Total incurred losses and LAE.................. 1,371.9 1,289.7 1,306.7
--------- --------- ---------
Payments, net of reinsurance recoverable:
Losses and LAE attributable to insured events
of current year............................. 759.6 652.2 650.2
Losses and LAE attributable to insured events
of prior years.............................. 627.6 614.3 566.9
--------- --------- ---------
Total payments................................. 1,387.2 1,266.5 1,217.1
--------- --------- ---------
Change in reinsurance recoverable on unpaid
losses........................................ (136.6) 51.1 14.8
--------- --------- ---------
Reserve for losses and LAE, end of year........ $2,744.1 $2,896.0 $2,821.7
--------- --------- ---------
--------- --------- ---------
</TABLE>
As part of an ongoing process, the property and casualty reserves have been
re-estimated for all prior accident years and were decreased by $141.4 million,
$137.6 million and $128.1 million in 1996, 1995 and 1994, respectively. The
increase in favorable development on prior years' reserves of $3.8 million in
1996 results primarily from an $11.4 million increase in favorable development
at Citizens.
The increase in Citizens' favorable development of $11.4 million in 1996
reflects improved severity in the personal automobile line, where favorable
development increased $28.6 million to $33.0 million in 1996, partially offset
by less favorable development in the workers' compensation line. In 1995, the
workers' compensation line had favorable development of $32.7 million, primarily
as a result of Citizens re-estimating reserves to reflect the new claims cost
management programs and the Michigan Supreme Court ruling, which decreases the
maximum to be paid for indemnity cases on all existing and future claims. In
1996, the favorable development in the workers' compensation line of $21.8
million also reflected these developments. Hanover's favorable development,
including voluntary and involuntary pools, decreased $7.7 million in 1996 to
$82.9 million, primarily attributable to a decrease in favorable development in
the workers' compensation line of $19.8 million to favorable development of
$17.3 million in 1996. This decrease is primarily attributable to a re-estimate
of reserves with respect to certain types of workers' compensation policies
including large deductibles and excess of loss policies. In addition, during
1995 the Regional Property and Casualty subsidiaries refined their estimation of
unallocated loss adjustment expenses which increased favorable
F-34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
development in that year. Favorable development in the personal automobile line
also decreased $4.7 million, to $42.4 million in 1996. These decreases were
offset by increases in favorable development of $1.9 million and $5.6 million,
to $12.6 million and $5.7 million, in the commercial automobile and commercial
multiple peril lines, respectively. Favorable development in other lines
increased by $8.8 million, primarily as a result of environmental reserve
strengthening in 1995. Favorable development in Hanover's voluntary and
involuntary pools increased $3.7 million to $4.1 million during 1996.
The increase in favorable development on prior years' reserves of $9.5
million in 1995 results primarily from a $34.6 million increase in favorable
development at Citizens. Favorable development in Citizens' personal automobile
and workers' compensation lines increased $16.6 million and $15.5 million, to
favorable development of $4.4 million and $32.7 million, respectively, due to
the aforementioned change in claims cost management and the Michigan Supreme
Court ruling. Hanover's favorable development, not including the effect of
voluntary and involuntary pools, was relatively unchanged at $90.2 million in
1995 compared to $91.7 million in 1994. Favorable development in Hanover's
workers' compensation line increased $27.7 million to $31.0 million during 1995.
This was offset by decreases of $14.6 million and $12.6 million, to $45.5
million and $0.1 million, in the personal automobile and commercial multiple
peril lines, respectively. Favorable development in Hanover's voluntary and
involuntary pools decreased $23.6 million to $0.4 million during 1995.
This favorable development reflects the Regional Property and Casualty
subsidiaries' reserving philosophy consistently applied over these periods.
Conditions and trends that have affected development of the loss and LAE
reserves in the past may not necessarily occur in the future.
Due to the nature of business written by the Regional Property and Casualty
subsidiaries, the exposure to environmental liabilities is relatively small, and
therefore, their reserves are relatively small compared to other types of
liabilities. Losses and LAE reserves related to environmental damage and toxic
tort liability, included in the total reserve for losses and LAE, were $50.8
million and $43.2 million, net of reinsurance of $20.2 million and $8.4 million,
at the end of 1996 and 1995, respectively. During 1995, the Regional Property
and Casualty subsidiaries redefined their environmental liabilities in
conformity with new guidelines issued by the NAIC. This had no impact on results
of operations. The Regional Property and Casualty subsidiaries do not
specifically underwrite policies that include this coverage, but as case law
expands policy provisions and insurers' liability beyond the intended coverage,
the Regional Property and Casualty subsidiaries may be required to defend such
claims. During 1995, Hanover performed an actuarial review of its environmental
reserves. This resulted in Hanover's providing additional reserves for "IBNR"
(incurred but not reported) claims, in addition to existing reserves for
reported claims. Although these claims are not material, their existence gives
rise to uncertainty and is discussed because of the possibility, however remote,
that they may become material. Management believes that, notwithstanding the
evolution of case law expanding liability in environmental claims, recorded
reserves related to these claims for environmental liability are adequate. In
addition, management is not aware of any litigation or pending claims that may
result in additional material liabilities in excess of recorded reserves. The
environmental liability could be revised in the near term if the estimates used
in determining the liability are revised.
19. MINORITY INTEREST
The Company's interest in Allmerica P&C is represented by ownership of 59.5%,
58.3% and 57.4% of the outstanding shares of common stock at December 31, 1996,
1995 and 1994, respectively. Earnings and shareholder's equity attributable to
minority shareholders are included in minority interest in the consolidated
financial statements.
F-35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
20. 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
On June 23, 1995, the governor of Maine approved a legislative settlement
for the Maine Workers' Compensation Residual Market Pool deficit for the years
1988 through 1992. The settlement provides for an initial funding of $220.0
million toward the deficit. The insurance carriers are liable for $65.0 million,
and employers will contribute $110.0 million payable through surcharges on
premiums over the course of the next ten years. The major insurers are
responsible for 90% of the $65.0 million. Hanover's allocated share of the
settlement is approximately $4.2 million, which was paid in December 1995. The
remainder of the deficit of $45.0 million will be paid by the Maine Guaranty
Fund, payable in quarterly contributions over ten years. A group of smaller
carriers filed litigation to appeal the settlement. The Company believes that
adequate reserves have been established for any additional liability.
The Company has been named a defendant in various other legal proceedings
arising in the normal course of business. In the opinion of management, 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.
RESIDUAL MARKETS
The Company is required to participate in residual markets in various
states. The results of the residual markets are not subject to the
predictability associated with the Company's own managed business, and are
significant to the workers' compensation line of business and both the private
passenger and commercial automobile lines of business.
21. STATUTORY FINANCIAL INFORMATION
The insurance subsidiaries are 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 for stock life insurance companies primarily because policy
acquisition costs are expensed when incurred, investment reserves are based on
different assumptions, postretirement benefit costs are based on different
assumptions and reflect a different method of adoption, life insurance reserves
are based on different assumptions and income tax expense reflects only taxes
paid or currently payable. Statutory net income and surplus are as follows:
<TABLE>
<CAPTION>
(IN MILLIONS) 1996 1995 1994
--------------------------------------------------- --------- --------- -------
<S> <C> <C> <C>
Statutory net income (Combined)
Property and Casualty Companies.................. $ 155.3 $ 155.3 $ 79.9
Life and Health Companies........................ 133.3 134.3 40.7
--------- --------- -------
Statutory Shareholder's Surplus (Combined)
Property and Casualty Companies.................. $1,201.6 $1,128.4 $974.3
Life and Health Companies........................ 1,120.1 965.6 465.3
--------- --------- -------
</TABLE>
F-36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
22. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The quarterly results of operations for 1996 and 1995 are summarized below:
<TABLE>
<CAPTION>
For the Three Months Ended
(In millions)
<S> <C> <C> <C> <C>
1996 March 31 June 30 Sept. 30 Dec. 31
Total revenues............................ $827.9 $799.4 $806.3 $839.3
-------- ------- -------- -------
Net income................................ $ 50.6 $ 45.3 $ 49.4 $ 48.2
-------- ------- -------- -------
-------- ------- -------- -------
1995
Total revenues............................ $841.4 $791.9 $822.8 $784.4
-------- ------- -------- -------
Income before extraordinary item.......... $ 39.2 $ 29.9 $ 34.8 $ 45.2
Extraordinary item -- demutualization
expense.................................. (2.5) (3.5) (4.7) (1.4)
-------- ------- -------- -------
Net income................................ $ 36.7 $ 26.4 $ 30.1 $ 43.8
-------- ------- -------- -------
-------- ------- -------- -------
</TABLE>
23. SUBSEQUENT EVENT (UNAUDITED)
On April 14, 1997, the Company entered into an agreement in principle to
transfer the Company's individual disability income business under a 100%
coinsurance arrangement to Metropolitan Life Insurance Company. The consummation
of the transaction is subject to the negotiation of definitive agreements and
regulatory approvals and is expected to occur on or before October 1, 1997. In
connection with this transaction, the Company has recorded an after-tax charge
of $35 million net income in the first quarter of 1997 related to the
reinsurance of this business.
F-37
<PAGE>
SEPARATE ACCOUNT I
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
<TABLE>
<CAPTION>
INVESTMENT GOVERNMENT
GROWTH GRADE INCOME MONEY MARKET EQUITY INDEX BOND
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
1 2 3 4 5
----------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
ASSETS (NOTES 3 AND 7):
Investments in shares of Allmerica Investment Trust........ $1,190,594 $ 203,192 $ 737,602 $ 361,974 $ 171,436
LIABILITIES:
Payable to First Allmerica Financial Life Insurance Company
(Sponsor)................................................. 1,163 200 673 353 166
----------- ------------ ------------ ------------ -----------
Net assets............................................... $1,189,431 $ 202,992 $ 736,929 $ 361,621 $ 171,270
----------- ------------ ------------ ------------ -----------
----------- ------------ ------------ ------------ -----------
Net asset distribution by category:
Qualified variable annuity policies...................... $1,189,431 $ 202,992 $ 736,929 $ 361,621 $ 171,270
----------- ------------ ------------ ------------ -----------
----------- ------------ ------------ ------------ -----------
Qualified units outstanding, December 31, 1996............. 7,167 1,700 6,498 2,087 1,501
Net asset value per qualified unit, December 31, 1996...... $165.954807 $119.394610 $113.414828 $173.260657 $114.084693
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-1
<PAGE>
SEPARATE ACCOUNT I
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
INVESTMENT
GROWTH GRADE INCOME MONEY MARKET EQUITY INDEX GOVERNMENT BOND
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
1 2 3 4 5
----------- ------------ ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................................................ $121,998 $12,383 $16,313 $ 9,503 $ 8,539
----------- ------------ ------------ ------------ -------
EXPENSES (NOTE 4):
Mortality and expense risk fees.......................... 8,115 1,763 2,824 2,092 1,276
Administrative expense fees.............................. 2,289 497 796 590 360
----------- ------------ ------------ ------------ -------
Total expenses......................................... 10,404 2,260 3,620 2,682 1,636
----------- ------------ ------------ ------------ -------
Net investment income.................................. 111,594 10,123 12,693 6,821 6,903
----------- ------------ ------------ ------------ -------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss)................................. 19,549 (832) -- 8,655 (1,068)
Net unrealized gain (loss)............................... 28,811 (4,754) -- 35,112 (2,633)
----------- ------------ ------------ ------------ -------
Net realized and unrealized gain (loss) on
investments.......................................... 48,360 (5,586) -- 43,767 (3,701)
----------- ------------ ------------ ------------ -------
Net increase in net assets from operations............. $159,954 $ 4,537 $12,693 $50,588 $ 3,202
----------- ------------ ------------ ------------ -------
----------- ------------ ------------ ------------ -------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
SEPARATE ACCOUNT I
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
INVESTMENT
GROWTH GRADE INCOME MONEY MARKET EQUITY INDEX
SUB-ACCOUNT 1 SUB-ACCOUNT 2 SUB-ACCOUNT 3 SUB-ACCOUNT 4
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
---------------------- ------------------ ------------------ ------------------
1996 1995 1996 1995 1996 1995 1996 1995
---------- ---------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income..................... $ 111,594 $ 61,072 $ 10,123 $ 7,620 $ 12,693 $ 14,380 $ 6,821 $ 7,145
Net realized gain (loss) on investments... 19,549 (464) (832) (149) -- -- 8,655 3,196
Net unrealized gain (loss) from security
transactions............................ 28,811 92,586 (4,754) 13,040 -- -- 35,112 18,996
---------- ---------- -------- -------- -------- -------- -------- --------
Net increase in net assets from
operations.............................. 159,954 153,194 4,537 20,511 12,693 14,380 50,588 29,337
---------- ---------- -------- -------- -------- -------- -------- --------
FROM CAPITAL TRANSACTIONS (NOTE 5):
Net deposits.............................. 440,513 190,334 79,703 35,941 507,585 73,363 192,147 19,664
Terminations.............................. (157,891) (71,551) (62,428) (10,187) (87,579) (159,752) (47,767) (28,719)
Other transfers from (to) the General
Account of First Allmerica Financial
Life Insurance Company (Sponsor)........ 30,795 21 21,654 2,123 64 (65) 38,928 2,420
---------- ---------- -------- -------- -------- -------- -------- --------
Net increase (decrease) in net assets from
capital transactions.................... 313,417 118,804 38,929 27,877 420,070 (86,454) 183,308 (6,635)
---------- ---------- -------- -------- -------- -------- -------- --------
Net increase (decrease) in net assets..... 473,371 271,998 43,466 48,388 432,763 (72,074) 233,896 22,702
NET ASSETS:
Beginning of year......................... 716,060 444,062 159,526 111,138 304,166 376,240 127,725 105,023
---------- ---------- -------- -------- -------- -------- -------- --------
End of year............................... $1,189,431 $ 716,060 $202,992 $159,526 $736,929 $304,166 $361,621 $127,725
---------- ---------- -------- -------- -------- -------- -------- --------
---------- ---------- -------- -------- -------- -------- -------- --------
<CAPTION>
GOVERNMENT BOND
SUB-ACCOUNT 5
YEAR ENDED
DECEMBER 31,
------------------
1996 1995
-------- --------
<S> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income..................... $ 6,903 $ 6,981
Net realized gain (loss) on investments... (1,068) (1,013)
Net unrealized gain (loss) from security
transactions............................ (2,633) 8,986
-------- --------
Net increase in net assets from
operations.............................. 3,202 14,954
-------- --------
FROM CAPITAL TRANSACTIONS (NOTE 5):
Net deposits.............................. 102,744 54,856
Terminations.............................. (74,845) (19,947)
Other transfers from (to) the General
Account of First Allmerica Financial
Life Insurance Company (Sponsor)........ (32,749) (5)
-------- --------
Net increase (decrease) in net assets from
capital transactions.................... (4,850) 34,904
-------- --------
Net increase (decrease) in net assets..... (1,648) 49,858
NET ASSETS:
Beginning of year......................... 172,918 123,060
-------- --------
End of year............................... $171,270 $172,918
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
SEPARATE ACCOUNT I
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 1 -- ORGANIZATION
Separate Account I (SA-I) is a separate investment account of First
Allmerica Financial Life Insurance Company (the Company), established on October
1, 1992 for the purpose of separating from the general assets of the Company
those assets used to fund certain variable annuity policies issued by the
Company. The Company is a wholly-owned subsidiary of Allmerica Financial
Corporation (AFC). Under applicable insurance law, the assets and liabilities of
SA-I are clearly identified and distinguished from the other assets and
liabilities of the Company. SA-I cannot be charged with liabilities arising out
of any other business of the Company.
SA-I is registered as a unit investment trust under the Investment Company
Act of 1940, as amended (the 1940 Act). SA-I currently offers five Sub-Accounts.
Each Sub-Account invests exclusively in a corresponding investment portfolio of
the Allmerica Investment Trust (the Trust) managed by Allmerica Investment
Management Company, Inc., a wholly-owned subsidiary of the Company. The Trust is
an open-end, diversified management investment company registered under the 1940
Act.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS -- Security transactions are recorded on the trade date.
Investments in shares of the Trust are stated at the net asset value per share
of the respective investment portfolio of the Trust. Net realized gains and
losses on securities sold are determined on 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
Trust at net asset value.
FEDERAL INCOME TAXES -- The Company is taxed as a "life insurance company"
under Subchapter L of the Internal Revenue Code and files a consolidated federal
income tax return. The Company anticipates no tax liability resulting from the
operations of SA-I. Therefore, no provision for income taxes has been charged
against SA-I.
NOTE 3 -- INVESTMENTS
The number of shares owned, aggregate cost, and net asset value per share of
each Sub-Account's investment in the Trust at December 31, 1996 were as follows:
<TABLE>
<CAPTION>
PORTFOLIO INFORMATION
----------------------------------
NET ASSET
NUMBER OF AGGREGATE VALUE
SUB-ACCOUNT INVESTMENT PORTFOLIO SHARES COST PER SHARE
- ----------- -------------------------------------------------------------- --------- ----------- ---------
<C> <S> <C> <C> <C>
Allmerica Investment Trust:
1 Growth...................................................... 510,328 $ 1,110,997 $2.333
2 Investment Grade Income..................................... 187,447 206,715 1.084
3 Money Market................................................ 737,602 737,602 1.000
4 Equity Index................................................ 167,193 309,028 2.165
5 Government Bond............................................. 165,479 174,414 1.036
</TABLE>
F-4
<PAGE>
SEPARATE ACCOUNT I
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 4 -- RELATED PARTY TRANSACTIONS
The Company makes a charge of .90% 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 .25% 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 but are paid to
the Company on a monthly basis.
An IRA account fee is currently deducted on the policy anniversary date and
upon full surrender of the IRA account. The IRA account fee is $25. For IRA
accounts established after April 30, 1993, the IRA account fee will be waived in
the following circumstances: if the contribution establishing the IRA account
was at least $15,000, the IRA account fee will be waived on the first
anniversary deduction; if the accumulated value is $15,000 as of December 31 of
the calendar year previous to any subsequent anniversary deduction, the IRA
account fee will be waived on such subsequent anniversary deduction. For the
year ended December 31, 1996, there were no IRA account fees deducted from
accumulated value in the Separate Account.
Allmerica Investments, Inc., (Allmerica Investments), a wholly-owned
subsidiary of the Company, is principal underwriter and general distributor of
SA-I, and does not receive any compensation for sales of the IRA policies.
Commissions are paid to registered representatives of Allmerica Investments by
the Company.
NOTE 5 -- POLICYOWNERS AND SPONSOR TRANSACTIONS
Transactions from policyowners were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1996 1995
--------------------------- ---------------------------
UNITS AMOUNT UNITS AMOUNT
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Sub-Account 1 -- Growth
Issuance of units....................... 3,189 $ 487,919 1,560 $ 194,420
Redemption of units..................... (1,149) (174,502) (607) (75,616)
------------ ------------- ------------ -------------
Net increase............................ 2,040 $ 313,417 953 $ 118,804
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Sub-Account 2 -- Investment Grade Income
Issuance of units....................... 871 $ 101,265 366 $ 40,028
Redemption of units..................... (539) (62,336) (108) (12,151)
------------ ------------- ------------ -------------
Net increase............................ 332 $ 38,929 258 $ 27,877
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Sub-Account 3 -- Money Market
Issuance of units....................... 5,070 $ 570,947 699 $ 73,511
Redemption of units..................... (1,365) (150,877) (1,521) (159,965)
------------ ------------- ------------ -------------
Net increase (decrease)................. 3,705 $ 420,070 (822) $ (86,454)
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Sub-Account 4 -- Equity Index
Issuance of units....................... 1,504 $ 228,554 173 $ 24,090
</TABLE>
F-5
<PAGE>
SEPARATE ACCOUNT I
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 5 -- POLICYOWNERS AND SPONSOR TRANSACTIONS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1996 1995
--------------------------- ---------------------------
UNITS AMOUNT UNITS AMOUNT
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Redemption of units..................... (308) (45,246) (269) (30,725)
------------ ------------- ------------ -------------
Net increase (decrease)................. 1,196 $ 183,308 (96) $ (6,635)
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Sub-Account 5 -- Government Bond
Issuance of units....................... 982 $ 110,613 549 $ 54,856
Redemption of units..................... (1,032) (115,463) (232) (19,952)
------------ ------------- ------------ -------------
Net increase (decrease)................. (50) $ (4,850) 317 $ 34,904
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
</TABLE>
NOTE 6 -- DIVERSIFICATION REQUIREMENTS
Under the provisions of Section 817(h) of the Internal Revenue 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 Treasury.
The Internal Revenue Service has issued regulations under Section 817(h) of
the Code. The Company believes that SA-I satisfies the current requirements of
the regulations, and it intends that SA-I will continue to meet such
requirements.
NOTE 7 -- PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of the Trust shares by SA-I during
the year ended December 31, 1996 were as follows:
<TABLE>
<CAPTION>
SUB-ACCOUNT INVESTMENT PORTFOLIO PURCHASES SALES
------------ -------------------------------------------------------------------------- ---------- --------
<C> <S> <C> <C>
Allmerica Investment Trust:
1 Growth.................................................................. $ 597,224 $171,755
2 Investment Grade Income................................................. 111,304 62,209
3 Money Market............................................................ 530,010 96,873
4 Equity Index............................................................ 253,416 63,061
5 Government Bond......................................................... 124,266 122,217
---------- --------
Totals.................................................................. $1,616,220 $516,115
---------- --------
---------- --------
</TABLE>
F-6
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of First Allmerica Financial
Life Insurance Company and
Policyowners of Separate Account I of
First Allmerica Financial Life Insurance 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 (1, 2,
3, 4 and 5) constituting the Separate Account I of First Allmerica Financial
Life Insurance Company at December 31, 1996, and the results of each of their
operations for the year then ended, and the changes in each of their net assets
for each of the two years in the period then ended, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of First Allmerica Financial Life Insurance Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these financial statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of investments owned at
December 31, 1996 by correspondence with the Trust, provide a reasonable basis
for the opinion expressed above.
/s/ Price Waterhouse LLP
- ----------------------
PRICE WATERHOUSE LLP
Boston, Massachusetts
March 26, 1997
F-7
<PAGE>
PART C. OTHER INFORMATION
Item 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) FINANCIAL STATEMENTS
FINANCIAL STATEMENTS INCLUDED IN PART A
None
FINANCIAL STATEMENTS INCLUDED IN PART B
Financial Statements for First Allmerica Financial Life Insurance Company
Financial Statements for Separate Account I of First Allmerica Financial
Life Insurance Company
FINANCIAL STATEMENTS INCLUDED IN PART C
None
(b) EXHIBITS
Exhibit 1 - Votes Authorizing Establishment of Registrant dated August 20,
1991 was previously filed on May 11, 1992 and is incorporated
by reference herein.
Exhibit 2 - Not Applicable. Pursuant to Rule 26a-2, the Insurance Company
may hold the assets of the Registrant NOT pursuant to a trust
indenture or other such instrument.
Exhibit 3 - Specimen Sales and Administrative Services Agreement was
previously filed on May 11, 1992 and is incorporated by reference
herein.
Exhibit 4 - Specimen Generic Contract and Certificate Forms was previously
filed on May 11, 1992 and is incorporated by reference herein.
Exhibit 5 - Specimen Application Form was previously filed on May 11, 1992
and is incorporated by reference herein.
Exhibit 6(a) - The Depositor's Articles of Incorporation and Bylaws were
previously filed on May 11, 1992 and are incorporated by
reference herein.
(b) - The Depositor's revised By-Laws were previously filed in Post-
Effective Amendment No. 9 on April 30, 1996 and is incorporated
by reference herein.
<PAGE>
Exhibit 7 - Not Applicable.
Exhibit 8(a) - AUV Calculation Services Agreement with The Shareholder
Services Group dated March 31, 1995 was previously filed in
Registration Statement No. 7 and is incorporated herein by
reference.
(b) - Services Agreement was previously filed in Post-Effective
Amendment No. 8 on April 30, 1996 and is incorporated by
reference herein.
Exhibit 9 - Consent and Opinion of Counsel.
Exhibit 10 - Consent of Independent Accountants
Exhibit 11 - None.
Exhibit 12 - None.
Exhibit 13 - None.
Exhibit 14 - Not Applicable.
Exhibit 15 - None
Exhibit 16 - Consent of Newly Elected Directors was previously filed in
Post-Effective Amendment No. 8 on April 30, 1996 and is
incorporated by reference herein.
Item 25. DIRECTORS AND EXECUTIVE OFFICERS OF THE DEPOSITOR.
The principal business address of all the following Directors and Officers
is:
440 Lincoln Street
Worcester, Massachusetts 01653
<PAGE>
DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY
NAME AND POSITION PRINCIPAL OCCUPATION(S) DURING
WITH COMPANY PAST FIVE YEARS
------------ ---------------
Bruce C. Anderson, Director and Vice Director of First Allmerica since
President 1996; Vice President, First Allmerica
Abigail M. Armstrong, Secretary and Secretary of First Allmerica since
Counsel 1996; Counsel, First Allmerica
John P. Kavanaugh, Director, Vice Director and Chief Investment Officer
President and Chief Investment of First Allmerica since 1996; Vice
Officer President, First Allmerica since 1991
John F. Kelly, Director, Senior Vice Director of First Allmerica since
President and General Counsel 1996; Senior Vice President, General
Counsel and Assistant Secretary,
First Allmerica
J. Barry May, Director Director of First Allmerica since
1996; Director and President, The
Hanover Insurance Company since 1996;
Vice President, The Hanover Insurance
Company, 1993 to 1996
James R. McAuliffe, Director Director of First Allmerica since
1996; President and CEO, Citizens
Insurance Company of America since
1994; Vice President 1982 to 1994 and
Chief Investment Officer, First
Allmerica 1986 to 1994
John F. O'Brien, Director, Chairman Director, Chairman of the Board,
of the Board, President and Chief President and Chief Executive
Executive Officer Officer, First Allmerica since 1989
Edward J. Parry, III, Director, Vice Director and Chief Financial Officer
President, Chief Financial Officer of First Allmerica since 1996; Vice
and Treasurer President and Treasurer, First
Allmerica since 1993
Richard M. Reilly, Director and Vice Director of First Allmerica since
President 1996; Vice President, First Allmerica
since 1990; Director, Allmerica
Investments, Inc. since 1990;
Director and President, Allmerica
Investment Management Company, Inc.
since 1990
Larry C. Renfro, Director and Vice Director of First Allmerica since
President 1996; Vice President, First Allmerica
since 1990
Eric A. Simonsen, Director and Vice Director of First Allmerica since
President 1996; Vice President, First Allmerica
since 1990; Chief Financial Officer,
First Allmerica 1990 to 1996
Phillip E. Soule, Director and Vice Director of First Allmerica since
President 1996; Vice President, First Allmerica
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANYNAME
NAME ADDRESS TYPE OF BUSINESS
---- ------- ----------------
AAM Equity Fund 440 Lincoln Street Massachusetts Grantor
Worcester MA 01653 Trust
AAM High Yield Fund, L.L.C. Limited Liability Company
AFC Capital Trust I Statutory Business Trust
Allmerica Asset Management, 440 Lincoln Street Investment advisory
Inc. Worcester MA 01653 services
Allmerica Employees Insurance 440 Lincoln Street Insurance Agency
Agency, Inc. Worcester MA 01653
Allmerica Equity Index Pool Grantor Trust
Allmerica Financial Alliance 100 North Parkway Multi-line property and
Insurance Company Worcester MA 01605 casualty insurance
Allmerica Financial Benefit 100 North Parkway Multi-line property and
Insurance Company Worcester MA 01605 casualty insurance
Allmerica Financial 440 Lincoln Street Holding Company
Corporation Worcester MA 01653
Allmerica Financial Insurance 440 Lincoln Street Insurance Broker
Brokers, Inc. Worcester MA 01653
Allmerica Financial Life 440 Lincoln Street Life insurance, accident
Insurance and Annuity Company Worcester MA 01653 and health insurance,
(formerly known as SMA Life annuities, variable
Assurance Company) annuities and variable
life insurance
Allmerica Financial Services 440 Lincoln Street Insurance Agency
Insurance Agency, Inc. Worcester MA 01653
Allmerica Funding Corp. 440 Lincoln Street Special purpose funding
Worcester MA 01653 vehicle for commercial
paper
Allmerica Funds 440 Lincoln Street Investment Company
Worcester MA 01653
Allmerica, Inc. 440 Lincoln Street Common employer for
Worcester MA 01653 Allmerica Financial
Corporation entities
Allmerica Institutional 440 Lincoln Street Accounting, marketing
Services, Inc.(formerly known Worcester MA 01653 and shareholder services
as 440 Financial Group of for investment companies
Worcester, Inc.)
Allmerica Investment 440 Lincoln Street Investment advisory
Management Company, Inc. Worcester MA 01653 services
<PAGE>
Allmerica Investments, Inc. 440 Lincoln Street Securities, retail
Worcester MA 01653 broker-dealer
Allmerica Investment Trust 440 Lincoln Street Investment Company
Worcester MA 01653
Allmerica Property & Casualty 440 Lincoln Street Holding Company
Companies, Inc. Worcester MA 01653
Allmerica Securities Trust 440 Lincoln Street Investment Company
Worcester MA 01653
Allmerica Services Corporation 440 Lincoln Street Internal administrative
Worcester MA 01653 services provider to
Allmerica Financial
Corporation entities
Allmerica Trust Company, N.A. 440 Lincoln Street Limited purpose national
Worcester MA 01653 trust company
AMGRO, Inc. 100 North Parkway Premium financing
Worcester MA 01605
APC Funding Corp. 440 Lincoln Street Special purpose funding
Worcester MA 01653 vehicle for commercial
paper
Beltsville Drive Limited 440 Lincoln Street Real estate partnership
Partnership Worcester MA 01653
Citizens Corporation 440 Lincoln Street Holding Company
Worcester MA 01653
Citizens Insurance Company 645 West Grand River Multi-line property and
of America Howell MI 48843 casualty insurance
Citizens Insurance Company of 333 Pierce Road Multi-line property and
Illinois Itasca IL 60143 casualty insurance
Citizens Insurance Company of 3950 Priority Way Multi-line property and
the Midwest South Drive, Suite casualty insurance
200 Indianapolis IN
46280
Citizens Insurance Company of 8101 N. High Street Multi-line property and
Ohio P.O. Box 342250 casualty insurance
Columbus OH 43234
Citizens Management, Inc. 645 West Grand River Services management
Howell MI 48843 company
First Allmerica Financial 440 Lincoln Street Life, pension, annuity,
Life Insurance Company Worcester MA 01653 accident and health
(formerly State Mutual Life insurance company
Assurance Company of America)
Greendale Special Placements 440 Lincoln Street Massachusetts Grantor
Fund Worcester MA 01653 Trust
<PAGE>
The Hanover American Insurance 100 North Parkway Multi-line property and
Company Worcester MA 01605 casualty insurance
The Hanover Insurance Company 100 North Parkway Multi-line property and
Worcester MA 01605 casualty insurance
Hanover Texas Insurance 801 East Campbell Attorney-in-fact for
Management Company, Inc. Road Hanover Lloyd's Insurance
Richardson TX 75081 Company
Hanover Lloyd's Insurance 801 East Campbell Multi-line property and
Company Road casualty insurance
Richardson TX 75081
Linder Skokie Real Estate 440 Lincoln Street Real estate holding
Corporation Worcester MA 01653 company
Lloyds Credit Corporation 440 Lincoln Street Premium financing service
Worcester MA 01653 franchises
Logan Wells Water Company, 603 Heron Drive Water Company serving
Inc. Bridgeport NJ 08014 land development
investment
Massachusetts Bay Insurance 100 North Parkway Multi-line property and
Company Worcester MA 01605 casualty insurance
SMA Financial Corp. 440 Lincoln Street Holding Company
Worcester MA 01653
Somerset Square, Inc. 440 Lincoln Street Real estate holding
Worcester MA 01653 company
Sterling Risk Management 440 Lincoln Street Risk management services
Services, Inc. Worcester MA 01653
Item 26. PERSONS UNDER COMMON CONTROL WITH REGISTRANT. See attached
organizational chart.
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Allmerica Financial Corporation
Delaware
| | | | |
___________________________________________________________________________________
100% 100% 100% 100% 100%
Allmerica, Inc. Allmerica First Allmerica AFC Capital Allmerica
Funding Corp. Financial Life Trust I Services
Insurance Corporation
Company
Massachusetts Massachusetts Massachusetts Delaware Massachusetts
|
_______________________________________________
|
100%
Logan Wells
Water Company,
Inc.
New Jersey
______________________________________________________________________________________________________________________
| | | | | |
59.47% 100% 99.2% 100% 100% 100%
Allmerica Sterling Risk Allmerica Somerset Allmerica Allmerica
Property Management Trust Square, Inc. Financial Life Institutional
& Casualty Services, Inc. Company, N.A. Insurance and Services, Inc.
Companies, Inc. Annuity Company
Federally
Delaware Delaware Chartered Massachusetts Delaware Massachusetts
|
___________________________________________________________________________
| | | |
100% 100% 100% 100%
APC The Hanover Allmerica Citizens
Funding Corp. Insurance Financial Insurance
Company Insurance Company of
Brokers, Inc. Illinois
Massachusetts New Hampshire Massachusetts Illinois
|
______________________________________________________________________________________________________________________
| | | | | |
100% 100% 100% 100% 82.5% 100%
Allmerica Allmerica The Hanover Hanover Texas Citizens Massachusetts
Financial Employee American Insurance Corporation Bay Insurance
Benefit Insurance Insurance Management Company
Insurance Agency, Inc. Company Company, Inc.
Company
Pennsylvania Massachusetts New Hampshire Texas Delaware New Hampshire
|
________________________________________________________
| | |
100% 100% 100%
Citizens Citizens Insurance Citizens
Insurance Company of Insurance
Company of Ohio America Company of the
Midwest
Ohio Michigan Indiana
|
_______________
100%
Citizens
Management Inc.
Michigan
<CAPTION>
Allmerica Financial Corporation
Delaware
| | | | |
___________________________________________________________________________________
100% 100% 100% 100% 100%
Allmerica, Inc. Allmerica First Allmerica AFC Capital Allmerica
Funding Corp. Financial Life Trust I Services
Insurance Corporation
Company
Massachusetts Massachusetts Massachusetts Delaware Massachusetts
|
_______________________________________________
|
100%
SMA
Financial Corp.
Massachusetts
|
______________________________________________________________________________________________________________________
| | | | | |
100% 100% 100% 100% 100% Allmerica
Allmerica Allmerica Allmerica Allmerica Linder Asset
Investments, Investment Asset Financial Services Skokie Management,
Inc. Management Management, Insurance Real Estate Limited
Company, Inc. Inc. Agency, Inc. Corporation
Massachusetts Massachusetts Massachusetts Massachusetts Massachusetts Bermuda
________________ _________________________________
Allmerica Equity Greendale AAM
Index Pool Special Equity Fund
Placements
Fund
Massachusetts Massachusetts Massachusetts
_____________________________________
| | Grantor Trusts established for the benefit of First
100% 100% Allmerica, Allmerica Financial Life, Hanover and
Allmerica AMGRO, Inc. Citizens
Financial Allmerica Allmerica Allmerica
Alliance Investment Trust Funds Securities
Insurance Trust
Company
Massachusetts Massachusetts Massachusetts
New Hampshire Massachusetts
|
|
100% Affiliated Management Investment Companies
Lloyd's
Credit Hanover Lloyd's
Corporation Insurance
Company
Massachusetts Texas
Affiliated Lloyd's plan company, controlled by
Underwriters for the benefit of the Hanover
Insurance Company
Beltsville
AAM High Drive
Yield Fund, Properties
L.L.C. Limited
Partnership
Massachusetts
Delaware
LLC established for the benefit of
First Allmerica, Allmerica Limited partnership involving First Allmerica, as
Financial Life, Hanover and general partner and Allmerica Financial Life as
Citizens limited partner
</TABLE>
<PAGE>
Item 27. NUMBER OF CONTRACT OWNERS.
As of December 31, 1996, the Separate Account had 160 Contract owners.
Item 28. INDEMNIFICATION.
To the fullest extent permissible under Massachusetts General Laws, no director
shall be personally liable to the Company or any policyholder for monetary
damages for any breach of fiduciary duty as a director, notwithstanding any
provision of law to the contrary; provided, however, that this provision shall
not eliminate or limit the liability of a director:
1. for any breach of the director's duty of loyalty to the Company or its
policyholders;
<PAGE>
2. for acts or omissions not in good faith, or which involve intentional
misconduct or a knowing violation of law;
3. for liability, if any, imposed on directors of mutual insurance companies
pursuant to M.G.L.A. c. 156B Section 61 or M.G.L.A. c.156B Section 62;
4. for any transactions from which the director derived an improper personal
benefit.
Insofar as indemnification for liability arising under the 1933 Act may be
permitted to Directors, Officers and Controlling Persons of Registrant under any
registration statement, underwriting agreement or otherwise, Registrant has been
advised that, in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the 1933 Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by Registrant of expenses incurred or
paid by a Director, Officer or Controlling Person of Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
Director, Officer or Controlling Person in connection with the securities being
registered, Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the 1933 Act and will be governed by the final
adjudication of such issue.
Item 29. PRINCIPAL UNDERWRITERS.
(a) Allmerica Investments, Inc. also acts as principal underwriter for the
following:
- VEL Account, VEL II Account, Inheiritage Account, Separate Accounts
VA-A, VA-B, VA-C, VA-G, VA-H, VA-K, VA-P, Allmerica Select Separate
Account, Separate Account KG, KGC, Fulcrum Separate Account and Fulcrum
Variable Life Separate Account of Allmerica Financial Life Insurance and
Annuity Company
- VEL II Account, Inheiritage Account, Separate Accounts VA-K, VA-P and
Allmerica Select Separate Account, Separate Account KG, KGC, Fulcrum
Separate Account of First Allmerica Financial Life Insurance Company
- Allmerica Investment Trust
(b) The Principal Business Address of each of the following Directors and
Officers of Allmerica Investments, Inc. is:
440 Lincoln Street
Worcester, Massachusetts 01653
NAME POSITION OR OFFICE WITH UNDERWRITER
- --------- -----------------------------------
Abigail M. Armstrong Secretary and Counsel
Richard F. Betzler, Jr. Vice President
Emil J. Aberizk Vice President and Chief Compliance Officer
Philip J. Coffey Vice President
John F. Kelly Director
John F. O'Brien Director
<PAGE>
Stephen Parker President, Director, and Chief Executive Officer
Edward J. Parry, III Treasurer
Richard M. Reilly Director
Eric A. Simonsen Director
Mark Steinberg Senior Vice President
William F. Monroe, Jr. Vice President
David J. Mueller Vice President
Item 30. LOCATION OF ACCOUNTS AND RECORDS.
Each account, book or other document required to be maintained by Section 31(a)
of the Investment Company Act of 1940 and Rules 31a-1 to 31a-3 thereunder are
maintained by the Company at 440 Lincoln Street, Worcester, Massachusetts.
Item 31. MANAGEMENT SERVICES.
Effective March 31, 1995, the Company provides daily unit value
calculations and related services for the Company's separate accounts.
Item 32. UNDERTAKINGS.
(a) Subject to the terms and conditions of Section 15(d) of the Securities
Exchange Act of 1934, the undersigned registrant hereby undertakes to file with
the Securities and Exchange Commission such supplementary and periodic
information, documents, and reports as may be prescribed by any rule or
regulation of the Commission heretofore or hereafter duly adopted pursuant to
authority conferred in that section.
(b) The registrant hereby undertakes to include as part of an application to
purchase a certificate under the Contract a space that the applicant can check
to request a Statement of Additional Information.
(c) The registrant hereby undertakes to deliver a Statement of Additional
Information promptly upon written or oral request, according to the requirements
of Form N-4.
<PAGE>
(e) The Company hereby represents that the aggregate fees and charges
under the Policies are reasonable in relation to the services rendered,
expenses expected to be incurred, and risks assumed by the Company.
Item 33. REPRESENTATIONS CONCERNING WITHDRAWAL RESTRICTIONS ON SECTION 403(b)
PLANS.
Not Applicable
<PAGE>
EXHIBIT TABLE
Exhibit 8 - Fidelity Agreement
Exhibit 9 - Consent and Opinion of Counsel
Exhibit 10 - Consent of Independent Accountants
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940 the Registrant certifies that it meets all of the
requirements for effectiveness of this Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereto duly
authorized, in the City of Worcester, and Commonwealth of Massachusetts on the
2nd day of April, 1997.
First Allmerica Financial Life Insurance Company
Separate Account I
(Registrant)
By:/s/ Abigail M. Armstrong
----------------------------
Abigail M. Armstrong, Secretary and Counsel
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the date indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/John F. O'Brien Director, President and Chief
- ---------------------- Executive Officer
John F. O'Brien
/s/Bruce C. Anderson Director and Vice President
- ----------------------
Bruce C. Anderson
/s/John P. Kavanaugh Director and Vice President
- -----------------------
John P. Kavanaugh
/s/John F. Kelly Director, Senior Vice President
- ----------------------- And General Counsel
John F. Kelly
/s/J. Barry May Director April 2, 1997
- -----------------------
J. Barry May
/s/James R. McAuliffe Director
- -----------------------
James R. McAuliffe
<PAGE>
/s/Edward J. Parry, III Director, Vice President, Treasurer
- ----------------------- And Chief Accounting Officer
Edward J. Parry, III
/s/Richard M. Reilly Director and Vice President
- -----------------------
Richard M. Reilly
/s/Larry C. Renfro Director and Vice President
- -----------------------
Larry C. Renfro
/s/Eric A. Simonsen Director, Vice President and
- ----------------------- Chief Financial Officer
Eric A. Simonsen
/s/Phillip E. Soule Director and Vice President
- -----------------------
Phillip E. Soule
<PAGE>
Exhibit 8(b)
FORM OF
SERVICE CONTRACT
With respect to shares of:
( ) Variable Insurance Products Fund - High Income Portfolio
( ) Variable Insurance Products Fund - Equity-Income Portfolio
( ) Variable Insurance Products Fund - Growth Portfolio
( ) Variable Insurance Products Fund - Overseas Portfolio
( ) Variable Insurance Products Fund II - Investment Grade Bond Portfolio
( ) Variable Insurance Products Fund II - Asset Manager Portfolio
( ) Variable Insurance Products Fund II - Contrafund Portfolio
( ) Variable Insurance Products Fund II - Asset Manager: Growth Portfolio
( ) Variable Insurance Products Fund III - Growth Opportunities Portfolio
( ) Variable Insurance Products Fund III - Balanced Portfolio
( ) Variable Insurance Products Fund III - Growth & Income Portfolio
To Fidelity Distributors Corporation:
We desire to enter into a Contract with you for activities in connection with
the distribution of shares and the servicing of shareholders of the Fund noted
above (the "Fund") of which you are the principal underwriter as defined in the
Investment Company Act of 1940 (the "Act") and for which you are the agent for
the continuous distribution of shares.
THE TERMS AND CONDITIONS OF THIS CONTRACT ARE AS FOLLOWS:
1. We shall provide distribution and certain shareholder services for our
clients who own Fund shares ("clients"), in which services may include, without
limitation: sale of shares of the Fund; answering client inquiries regarding the
Fund; assistance to clients in changing dividend options, account designations
and addresses; performance of subaccounting; processing purchase and redemption
transactions, including automatic investment and redemption of client account
cash balances; providing periodic statements showing a client's account balance
and the integration of such statements with other transactions; arranging for
bank wires; and providing such other information and services as you reasonably
may request.
2. We shall provide such office space and equipment, telephone facilities and
personnel (which may be all or any part of the space, equipment and facilities
currently used in our business, or all or any personnel employed by us) as is
necessary or beneficial for providing information and services to shareholders
of the Fund, and to assist you in servicing accounts of clients.
3. We agree to indemnify and hold you, the Fund, and the Fund's adviser and
transfer agent harmless from any and all direct or indirect liabilities or
losses resulting from requests, directions, actions or inactions, of or by us or
our officers, employees or agents regarding the purchase, redemption, transfer
or registration of shares for our clients. Such indemnification shall survive
the termination of this Contract.
Neither we nor any of our officers, employees or agents are authorized to
make any representation concerning Fund shares except those contained in the
then current Fund Prospectus, copies of which will be supplied by you to us; and
we shall have no authority to act as agent for the Fund or for you.
4. In consideration of the services and facilities described herein, we shall
be entitled to receive, and you shall cause to be paid to us by yourself or by
Fidelity Management & Research Company, investment adviser of the Fund, such
fees as are set forth in the accompanying "Fee Schedule for Qualified
Recipients." We understand that the payment of such fees has been authorized
pursuant to a Service Plan approved by the
<PAGE>
Board of Trustees of the Fund, and those Trustees who are not "interested
persons" of the fund (as defined in the Act) and who have no direct or indirect
financial interest in the operation of the Service Plan or in any agreements
related to the Service Plan (hereinafter referred to as "Qualified Trustees"),
and shareholders of the Fund, that such fees will be paid out of the fees paid
to the Fund's investment adviser, said adviser's past profits or any other
source available to said adviser; that the cost to the Fund for such fees shall
not exceed the amount of the advisory and service fee; and that such fees are
subject to change during the term of this Contract and shall be paid only so
long as this Contract is in effect.
5. We agree to conduct our activities in accordance with any applicable
federal or state laws, including securities laws and any obligation thereunder
to disclose to our clients the receipt of fees in connection with their
investment in the Fund.
6. You reserve the right, at your discretion and without notice, to suspend
the sale of shares or withdraw the sale of shares of the Fund.
7. This contract shall continue in force for one year from the effective date
(see below), and thereafter shall continue automatically for successive annual
periods, provided such continuance is specifically subject to termination
without penalty at any time if a majority of the Fund's Qualified Trustees vote
to terminate or not to continue the Service Plan. This Contract is also
terminable without penalty at any time the Service Plan is terminated by vote of
a majority of the Fund's outstanding voting securities upon 60 days' written
notice thereof to us. This Contract may also be terminated by us, for any
reason, upon 15 days' written notice to you. Notwithstanding anything contained
herein, in the event that the Service Plan shall terminate or we shall fail to
perform the distribution and shareholder servicing functions contemplated by
this Contract, such determination to be made in good faith by the Fund or you,
this Contract is terminable effective upon receipt of notice thereof by us.
This Contract will also terminate automatically in the event of its assignment
(as defined in the Act).
8. All communications to you shall be sent to you at your offices, 82
Devonshire Street, Boston, MA 02109. Any notice to us shall be duly given if
mailed or telegraphed to us at the address shown in this contract.
9. This Contract shall be construed in accordance with the laws of the
Commonwealth of Massachusetts.
Very truly yours,
- --------------------------------------------------------------------------------
Name of Qualified Recipient (Please Print or Type)
- --------------------------------------------------------------------------------
Street City State Zip Code
By:
----------------------------------------------------------------------------
Authorized Signature
Date:
----------------------------------
NOTE: Please return two signed copies of this Service Contract to Fidelity
Distributors Corporation. Upon acceptance, one countersigned copy will be
returned to you.
FOR INTERNAL USE ONLY:
EFFECTIVE DATE: JANUARY 1, 1997
<PAGE>
FEE SCHEDULE FOR QUALIFIED RECIPIENTS OF
Variable Insurance Products Fund - High Income Portfolio
Variable Insurance Products Fund - Equity-Income Portfolio
Variable Insurance Products Fund - Growth Portfolio
Variable Insurance Products Fund - Overseas Portfolio
Variable Insurance Products Fund II - Investment Grade Bond Portfolio
Variable Insurance Products Fund II - Asset Manager Portfolio
Variable Insurance Products Fund II - Contrafund Portfolio
Variable Insurance Products Fund II - Asset Manager: Growth Portfolio
Variable Insurance Products Fund III - Growth Opportunities Portfolio
Variable Insurance Products Fund III - Balanced Portfolio
Variable Insurance Products Fund III - Growth & Income Portfolio
(1) Those who have signed the Service Agreement, who meet the requirements
of paragraph (4) below, and who render distribution, administrative support and
recordkeeping services as described therein, will hereafter be referred to as
"Qualified Recipients."
(2) Qualified Recipients who perform distribution services for their
clients including, without limitation, sale of Portfolio shares, answering
routine client inquiries about the Portfolio(s), completing Portfolio
applications for the client, and producing Portfolio sales brochures or other
marketing materials, will earn a quarterly fee at an annualized rate of 0.06%
(six basis points) of the average aggregate net assets of their clients invested
in the Portfolios.
(3) The fees paid to each Qualified Recipient will be calculated and paid
quarterly. Checks will be mailed to each Qualified Recipient by the 30th of the
following month.
(4) In order to be assured of receiving payment under this Agreement for a
given calendar quarter, a Qualified Recipient must have insurance company
clients with a minimum of $100 million of average net assets in the aggregate in
the mutual fund portfolios shown below. For any calendar quarter during which
assets in these portfolios are in the aggregate less than $100 million, the
amount of qualify assets may be considered to be zero for the purpose of
computing the payments due.
Variable Insurance Products Fund - Equity-Income Portfolio
Variable Insurance Products Fund - Growth Portfolio
Variable Insurance Products Fund - Overseas Portfolio
Variable Insurance Products Fund II - Asset Manager Portfolio
Variable Insurance Products Fund II - Contrafund Portfolio
Variable Insurance Products Fund II - Asset Manager: Growth Portfolio
Variable Insurance Products Fund III - Growth Opportunities Portfolio
Variable Insurance Products Fund III - Balanced Portfolio
Variable Insurance Products Fund III - Growth & Income Portfolio
<PAGE>
AMENDMENT TO SERVICE AGREEMENT
This Amendment to Service Agreement, effective as of the 1st day of
January, 1997, modifies an agreement entered into by and between FIDELITY
INVESTMENTS INSTITUTIONAL OPERATIONS COMPANY ("FIIOC") and ALLMERICA
FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY ("Company") as of the 1st day of
November, 1995 (the "Agreement").
WHEREAS, Fidelity now has a third insurance-dedicated mutual fund, Variable
Insurance Products Fund III, which the parties are desirous of including in this
Agreement; and
WHEREAS, the parties also desire to make technical amendments to the
Agreement;
NOW, THEREFORE, the parties do hereby agree to amend the Agreement as
follows:
1. The term "Funds" now includes Variable Insurance Products Fund,
Variable Insurance Products Fund II, and Variable Insurance Products Fund III.
2. Paragraph 3 of the Agreement is amended to change the compensation
rate from 2 basis points to 4 basis points, and to place a cap on the maximum
quarterly payment, by making the following changes:
(a) Each place that the figure 0.0002 appears, it is hereby replaced with
the figure 0.0004, and each place that the words "two basis points" appear they
are hereby replaced with "four basis points;" and
(b) The following language is hereby added to the end of paragraph 3:
"Notwithstanding anything else in this Agreement, the maximum Payment to which
Company shall be entitled with respect to any calendar quarter or stub period is
One Million Dollars ($1,000,000)."
IN WITNESS WHEREOF, the parties have set their hand as of the date first
above written.
FIDELITY INVESTMENTS INSTITUTIONAL OPERATIONS COMPANY, INC.
By: /s/ Thomas J. Fryer
-------------------------------
Thomas J. Fryer
Vice President
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
By: /s/ Richard M. Reilly
-------------------------------
Name: Richard M. Reilly
-----------------------------
Title: Vice President
----------------------------
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
April 2, 1997
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
440 Lincoln Street
Worcester MA 01653
Gentlemen:
In my capacity as Counsel of FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(the "Company"), I have participated in the preparation of the Post-Effective
Amendment to the Registration Statement for Separate Account I on Form N-4 under
the Securities Act of 1933 and the Investment Company Act of 1940, with respect
to the Company's group variable annuity contracts.
I am of the following opinion:
1. Separate Account I is a separate account of the Company validly existing
pursuant to the Massachusetts Insurance Code and the regulations issued
thereunder.
2. The assets held in Separate Account I are not chargeable with liabilities
arising out of any other business the Company may conduct.
3. The group variable annuity contracts, when issued in accordance with the
Prospectus contained in the Registration Statement and upon compliance with
applicable local law, will be legal and binding obligations of the Company
in accordance with their terms and when sold will be legally issued, fully
paid and non-assessable.
In arriving at the foregoing opinion, I have made such examination of law and
examined such records and other documents as in my judgment are necessary or
appropriate.
I hereby consent to the filing of this opinion as an exhibit to the
Post-Effective Amendment to the Registration Statement filed under the
Securities Act of 1933.
Very truly yours,
/s/Sylvia Kemp-Orino
Sylvia Kemp-Orino
Assistant Vice President
and Counsel
<PAGE>
Exhibit 10
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 9 to the Registration
Statement on Form N-4 of our report dated February 3, 1997, except as to
Notes 1 and 2, which are as of February 19, 1997, relating to the financial
statements of First Allmerica Financial Life Insurance Company and our report
dated March 26, 1997, relating to the financial statements of the Separate
Account I of First Allmerica Financial Life Insurance Company, both of which
appear in such Statement of Additional Information. We also consent to the
reference to us under the heading "Experts" in such Statement of Additional
Information.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Boston, Massachusetts
April 21, 1997
