<PAGE>
File 33-71056
811-8130
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933 OF
SECURITIES OF UNIT INVESTMENT TRUSTS REGISTERED ON FORM
N-8B-2
Post-Effective Amendment No. _5_
VEL II ACCOUNT OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(Exact Name of Registrant)
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
440 Lincoln Street
Worcester MA 01653
(Address of Principal Executive Office)
Abigail M. Armstrong, Secretary and Counsel
First Allmerica Financial Life Insurance Company
440 Lincoln Street
Worcester MA 01653
(Name and Address of Agent for Service of Process)
It is proposed that this filing will become effective:
_X_ Immediately upon filing pursuant to paragraph (b)
___ On (_________) 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
FLEXIBLE PREMIUM VARIABLE LIFE
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, 1995 was filed on February 29,
1996.
<PAGE>
RECONCILIATION AND TIE BETWEEN ITEMS
IN FORM N-8b-2 AND THE PROSPECTUS
ITEM NO. OF
FORM N-8B-82 CAPTION IN PROSPECTUS
- ------------ ---------------------
1 ...................... Cover Page
2 ...................... Cover Page
3 ...................... Not Applicable
4 ...................... Distribution
5 ...................... The Company, The VEL II Account
6 ...................... The VEL II Account
7 ...................... Not Applicable
8 ...................... Not Applicable
9 ...................... Legal Proceedings
10 ..................... Summary; Description of the Company, The
VEL II Account, Allmerica Investment
Trust, Variable Insurance Products Fund,
Variable Insurance Products Fund II, T.
Rowe Price International Series, Inc. and
Delaware Group Premium Fund; The Policy;
Policy Termination and Reinstatement; Other
Policy Provisions
11 ..................... Summary; Allmerica Investment Trust;
Variable Insurance Products Fund; Variable
Insurance Products Fund II; T. Rowe Price
International Series, Inc.; Delaware Group
Premium Fund, Inc.; Investment Objectives
and Policies
12 ..................... Summary; Allmerica Investment Trust;
Variable Insurance Products Fund; Variable
Insurance Products Fund II; T. Rowe Price
International Series, Inc.; Delaware Group
Premium Fund, Inc.
13 ..................... Summary; Allmerica Investment Trust;
Variable Insurance Products Fund; Variable
Insurance Products Fund II; T. Rowe Price
International Series, Inc.; Delaware Group
Premium Fund, Inc.; Investment Advisory
Services to the Trust; Investment Advisory
Services to Variable Insurance Products
Fund; Investment Advisory Services to
Variable Insurance Products Fund II;
Investment Advisory Services to T. Rowe
Price International Series, Inc.; Investment
Advisory Services to Delaware Group
Premium Fund, Inc.; Charges and Deductions
14 ..................... Summary; Application for a Policy
15 ..................... Summary; Application for a Policy;
Premium Payments; Allocation of Net
Premiums
16 ..................... The VEL II Account; Allmerica
Investment Trust; Variable Insurance
Products Fund; Variable Insurance Products
Fund II; T. Rowe Price International Series,
Inc.; Delaware Group Premium Fund, Inc.;
Premium Payments; Allocation of Net
Premiums
17 ..................... Summary; Surrender; Partial Withdrawal;
Charges and Deductions; Policy
Termination and Reinstatement
<PAGE>
18 ..................... The VEL II Account; Allmerica
Investment Trust; Variable Insurance
Products Fund; Variable Insurance Products
Fund II; T. Rowe Price International Series,
Inc.; Delaware Group Premium Fund, Inc.;
Premium Payments
19 ..................... Reports; Voting Rights
20 ..................... Not Applicable
21 ..................... Summary; Policy Loans; Other Policy
Provisions
22 ..................... Other Policy Provisions
23 ..................... Not Required
24 ..................... Other Policy Provisions
25 ..................... The Company
26 ..................... Not Applicable
27 ..................... The Company
28 ..................... Directors and Principal Officers of the
Company
29 ..................... The Company
30 ..................... Not Applicable
31 ..................... Not Applicable
32 ..................... Not Applicable
33 ..................... Not Applicable
34 ..................... Not Applicable
35 ..................... Distribution
36 ..................... Not Applicable
37 ..................... Not Applicable
38 ..................... Summary; Distribution
39 ..................... Summary; Distribution
40 ..................... Not Applicable
41 ..................... The Company, Distribution
42 ..................... Not Applicable
43 ..................... Not Applicable
44 ..................... Premium Payments; Policy Value and Cash
Surrender Value
45 ..................... Not Applicable
46 ..................... Policy Value and Cash Surrender Value;
Federal Tax Considerations
47 ..................... The Company
48 ..................... Not Applicable
49 ..................... Not Applicable
50 ..................... The VEL II Account
51 ..................... Cover Page; Summary; Charges and
Deductions; The Policy; Policy Termination
and Reinstatement; Other Policy Provisions
52 ..................... Addition, Deletion or Substitution of
Investment
53 ..................... Federal Tax Considerations
54 ..................... Not Applicable
55 ..................... Not Applicable
56 ..................... Not Applicable
57 ..................... Not Applicable
58 ..................... Not Applicable
59 ..................... Not Applicable
<PAGE>
This prospectus describes individual flexible premium variable life insurance
policies ("Policies") offered by First Allmerica Financial Life Insurance
Company ("Company") to applicants Age 80 years old and under. Within limits, you
may choose the amount of initial premium desired and the initial Sum Insured.
You have the flexibility to vary the frequency and amount of premium payments,
subject to certain restrictions and conditions. You may withdraw a portion of
the Policy's surrender value, or the Policy may be fully surrendered at any
time, subject to certain limitations. Because of the substantial nature of the
surrender charge, the Policy is not suitable for short-term investment purposes.
A Policyowner contemplating surrender of a Policy should pay special attention
to the limitation of deferred sales charges on surrenders in the first two years
following issuance or Face Amount increase.
The Policies permit you to allocate net premiums among up to seven of eighteen
sub-accounts ("Sub-Accounts") of the VEL II Account, a separate account of the
Company, and a fixed interest account ("General Account") of the Company
(together "Accounts"). Each Sub-Account invests its assets in a corresponding
investment portfolio of Allmerica Investment Trust ("Trust"), Variable Insurance
Products Fund ("Fidelity VIP"), Variable Insurance Products Fund II ("Fidelity
VIP II"), T. Rowe Price International Series, Inc ("T. Rowe Price") or Delaware
Group Premium Fund, Inc. ("DGPF"). The Trust is managed by Allmerica Investment
Management Company, Inc. ("Allmerica Investment"). Fidelity VIP and Fidelity VIP
II are managed by Fidelity Management & Research Company ("Fidelity
Management"). T. Rowe Price is managed by Rowe Price-Fleming International, Inc.
("Price-Fleming"). The International Equity Series, which is the only investment
portfolio of DGPF available under the Policies, is managed by Delaware
International Advisers Ltd. ("Delaware International").
In certain circumstances, a Policy may be considered a "modified endowment
contract." Under the Internal Revenue Code, any policy loan, partial withdrawal
or surrender from a modified endowment contract may be subject to tax and tax
penalties. See "FEDERAL TAX CONSIDERATIONS -- Modified Endowment Contracts."
------------------------
IT MAY NOT BE ADVANTAGEOUS TO PURCHASE FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
AS A REPLACEMENT FOR YOUR CURRENT LIFE INSURANCE OR IF YOU ALREADY OWN A
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY.
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY CURRENT PROSPECTUSES OF THE
ALLMERICA INVESTMENT TRUST, VARIABLE INSURANCE PRODUCTS FUND, VARIABLE INSURANCE
PRODUCTS FUND II, T. ROWE PRICE INTERNATIONAL SERIES, INC. AND DELAWARE GROUP
PREMIUM FUND, INC. THE FIDELITY VIP HIGH INCOME PORTFOLIO INVESTS IN HIGHER
YIELDING, HIGHER RISK, LOWER RATED DEBT SECURITIES (SEE "INVESTMENT OBJECTIVES
AND POLICIES" IN THIS PROSPECTUS). 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 POLICIES ARE OBLIGATIONS OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
AND ARE DISTRIBUTED BY ALLMERICA INVESTMENTS, INC. THE POLICIES ARE NOT DEPOSITS
OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK OR CREDIT UNION. THE
POLICIES ARE NOT INSURED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE
CORPORATION (FDIC), OR ANY OTHER FEDERAL AGENCY. INVESTMENTS IN THE POLICIES ARE
SUBJECT TO VARIOUS RISKS, INCLUDING THE FLUCTUATION OF VALUE AND POSSIBLE LOSS
OF PRINCIPAL.
Prospectus Dated April 30, 1996
(Revised August 30, 1996)
440 Lincoln Street
Worcester, Massachusetts 01653
(508) 855-1000
<PAGE>
(Continued from cover page)
The Trust, Fidelity VIP, Fidelity VIP II, T. Rowe Price and DGPF are open-end,
diversified series investment companies. Eleven different investment portfolios
of the Trust are available under the Policies: the Growth Fund, Investment Grade
Income Fund, Money Market Fund, Equity Index Fund, Government Bond Fund, Select
International Equity Fund, Select Aggressive Growth Fund, Select Capital
Appreciation Fund, Select Growth Fund, Select Growth and Income Fund and Small
Cap Value Fund (the "Funds"). Four different investment portfolios of Fidelity
VIP are available under the Policies: Fidelity VIP High Income Portfolio,
Fidelity VIP Equity-Income Portfolio, Fidelity VIP Growth Portfolio, and
Fidelity VIP Overseas Portfolio ("Portfolios"). One investment portfolio of
Fidelity VIP II ("Portfolio") is available under the Policies: the Fidelity VIP
II Asset Manager Portfolio. One investment portfolio of T. Rowe Price
("Portfolio") is available under the Policies: the T. Rowe Price International
Stock Portfolio. One investment portfolio of DGPF ("Series") is available under
the Policies: the International Equity Series. Each Fund, Portfolio and Series
has its own investment objectives. The accompanying prospectuses of the Trust,
Fidelity VIP, Fidelity VIP II,T. Rowe Price and DGPF describe the investment
objectives and certain attendant risks of each Underlying Fund. The T. Rowe
Price International Stock Portfolio is not available in all states.
There is no guaranteed minimum Policy value. The value of a Policy will vary up
or down to reflect the investment experience of allocations to the Sub-Accounts
and the fixed rates of interest earned by allocations to the General Account.
The Policy value will also be adjusted for other factors, including the amount
of charges imposed. The Policy will remain in effect so long as the Policy value
less any surrender charges and less any outstanding debt is sufficient to pay
certain monthly charges imposed in connection with the Policy. The Policy value
may decrease to the point where the Policy will lapse and provide no further
death benefit without additional premium payments.
If the Policy is in effect at the death of the Insured, the Company will pay a
death benefit (the "Death Proceeds") to the beneficiary. Prior to the Final
Premium Payment Date, the Death Proceeds equal the Sum Insured, less any debt,
partial withdrawals, and any due and unpaid charges. You may choose either Sum
Insured Option 1 (the Sum Insured is fixed in amount) or Sum Insured Option 2
(the Sum Insured includes the Policy value in addition to a fixed insurance
amount). A Policyowner has the right to change the Sum Insured Option, subject
to certain conditions. A Guideline Minimum Sum Insured, equivalent to a
percentage of the Policy value, will apply if greater than the Sum Insured
otherwise payable under Option 1 or Option 2.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
SPECIAL TERMS........................................................... 5
SUMMARY................................................................. 8
PERFORMANCE INFORMATION................................................. 15
DESCRIPTION OF THE COMPANY, THE VEL II ACCOUNT, ALLMERICA INVESTMENT
TRUST, VARIABLE INSURANCE PRODUCTS FUND, VARIABLE INSURANCE PRODUCTS
FUND II, T. ROWE PRICE INTERNATIONAL SERIES, INC. AND DELAWARE GROUP
PREMIUM FUND, INC...................................................... 17
INVESTMENT OBJECTIVES AND POLICIES.................................. 19
INVESTMENT ADVISORY SERVICES
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS.................. 25
VOTING RIGHTS....................................................... 25
THE POLICY.............................................................. 26
APPLICATION FOR A POLICY............................................ 26
FREE LOOK PERIOD.................................................... 27
CONVERSION PRIVILEGES............................................... 27
PREMIUM PAYMENTS.................................................... 27
ALLOCATION OF NET PREMIUMS.......................................... 28
TRANSFER PRIVILEGE.................................................. 28
DEATH PROCEEDS...................................................... 29
SUM INSURED OPTIONS................................................. 30
CHANGE IN SUM INSURED OPTION........................................ 32
CHANGE IN FACE AMOUNT............................................... 32
POLICY VALUE AND SURRENDER VALUE.................................... 33
PAYMENT OPTIONS..................................................... 35
OPTIONAL INSURANCE BENEFITS......................................... 35
SURRENDER........................................................... 35
PARTIAL WITHDRAWAL.................................................. 35
CHARGES AND DEDUCTIONS.................................................. 36
TAX EXPENSE CHARGE.................................................. 36
MONTHLY DEDUCTION FROM POLICY VALUE................................. 36
CHARGES AGAINST ASSETS OF THE VEL II ACCOUNT........................ 38
SURRENDER CHARGE.................................................... 39
CHARGES ON PARTIAL WITHDRAWAL....................................... 40
TRANSFER CHARGES.................................................... 41
CHARGE FOR INCREASE IN FACE AMOUNT.................................. 41
OTHER ADMINISTRATIVE CHARGES........................................ 41
POLICY LOANS............................................................ 41
POLICY TERMINATION AND REINSTATEMENT.................................... 42
OTHER POLICY PROVISIONS................................................. 43
DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY......................... 45
DISTRIBUTION............................................................ 45
REPORTS................................................................. 46
LEGAL PROCEEDINGS....................................................... 46
FURTHER INFORMATION..................................................... 46
INDEPENDENT ACCOUNTANTS................................................. 46
FEDERAL TAX CONSIDERATIONS.............................................. 47
THE COMPANY AND THE VEL II ACCOUNT.................................. 47
TAXATION OF THE POLICIES............................................ 47
MODIFIED ENDOWMENT CONTRACTS........................................ 48
MORE INFORMATION ABOUT THE GENERAL ACCOUNT.............................. 48
GENERAL DESCRIPTION................................................. 48
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
GENERAL ACCOUNT VALUE............................................... 49
THE POLICY.......................................................... 49
TRANSFERS, SURRENDERS, PARTIAL WITHDRAWALS AND POLICY LOANS......... 49
FINANCIAL STATEMENTS.................................................... F-1
APPENDIX A -- OPTIONAL BENEFITS......................................... A-1
APPENDIX B -- PAYMENT OPTIONS........................................... A-2
APPENDIX C -- ILLUSTRATIONS OF SUM INSURED, POLICY VALUES AND
ACCUMULATED PREMIUMS................................................... A-4
APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES.................. A-10
</TABLE>
4
<PAGE>
SPECIAL TERMS
ACCUMULATION UNIT: A measure of your interest in a Sub-Account.
AGE: The Insured's age as of the nearest birthday measured from a Policy
anniversary.
BENEFICIARY: The person(s) designated by the owner of the Policy to receive the
insurance proceeds upon the death of the Insured.
COMPANY: First Allmerica Financial Life Insurance Company
DATE OF ISSUE: The date set forth in the Policy used to determine the Monthly
Payment Date, Policy months, Policy years, and Policy anniversaries.
DEATH PROCEEDS: Prior to the Final Premium Payment Date, the Death Proceeds
equal the amount calculated under the applicable Sum Insured Option (Option 1 or
Option 2), less Debt outstanding at the time of the Insured's death, partial
withdrawals, if any, partial withdrawal charges, and any due and unpaid Monthly
Deductions. After the Final Premium Payment Date, the Death Proceeds equal the
Surrender Value of the Policy.
DEBT: All unpaid Policy loans plus interest due or accrued on such loans.
DELIVERY RECEIPT: An acknowledgment, signed by the Policyowner and returned to
the Company's Principal Office, that the Policyowner has received the Policy and
the Notice of Withdrawal Rights.
EVIDENCE OF INSURABILITY: Information, including medical information
satisfactory to the Company, that is used to determine the Insured's Premium
Class.
FACE AMOUNT: The amount of insurance coverage applied for. The Face Amount of
each Policy is set forth in the specification pages of the Policy.
FINAL PREMIUM PAYMENT DATE: The Policy anniversary nearest the Insured's 95th
birthday. The Final Premium Payment Date is the latest date on which a premium
payment may be made. After this date, the Death Proceeds equal the Surrender
Value of the Policy.
GENERAL ACCOUNT: All the assets of the Company other than those held in a
separate account.
GUIDELINE ANNUAL PREMIUM: The annual amount of premium that would be payable
through the Final Premium Payment Date of a Policy for the specified Sum
Insured, if premiums were fixed by the Company as to both timing and amount, and
monthly cost of insurance charges were based on the 1980 Commissioners Standard
Ordinary Mortality Tables (Mortality Table B, Smoker or Non-Smoker, Male or
Female), net investment earnings at an annual effective rate of 5%, and fees and
charges as set forth in the Policy and any Policy riders. The Sum Insured Option
1 Guideline Annual Premium is used when calculating the maximum surrender
charge.
GUIDELINE MINIMUM SUM INSURED: The minimum Sum Insured required to qualify the
Policy as "life insurance" under Federal tax laws. The Guideline Minimum Sum
Insured varies by Age. It is calculated by multiplying the Policy Value by a
percentage determined by the Insured's Age.
INSURANCE AMOUNT AT RISK: The Sum Insured less the Policy Value.
LOAN VALUE: The maximum amount that may be borrowed under the Policy.
MINIMUM MONTHLY FACTOR: A monthly premium amount calculated by the Company and
specified in your Policy. If you pay this amount, the Company guarantees that
your Policy will not lapse prior to the 49th Monthly Deduction after the Date of
Issue or the effective date of an increase in the Face Amount. However, making
payments at least equal to the Minimum Monthly Factors will not prevent the
Policy from lapsing if (a) Debt exceeds Policy Value less surrender charges or
(b) partial withdrawals and partial withdrawal charges have reduced premium
payments below an amount equal to the Minimum Monthly Factor multiplied by the
number of months since the Date of Issue or the effective date of an increase.
5
<PAGE>
MONTHLY DEDUCTION: Charges deducted monthly from the Policy Value of a Policy
prior to the Final Premium Payment Date. The charges include the monthly cost of
insurance, the monthly cost of any benefits provided by riders, and the monthly
administrative charge.
MONTHLY PAYMENT DATE: The date on which the Monthly Deduction is deducted from
Policy Value.
NET PREMIUM: An amount equal to the premium less a tax expense charge.
POLICY CHANGE: Any change in the Face Amount, the addition or deletion of a
rider, or a change in the Sum Insured Option.
POLICY VALUE: The total amount available for investment under a Policy at any
time. It is equal to the sum of (a) the value of the Accumulation Units credited
to a Policy in the Sub-Accounts and (b) the accumulation in the General Account
credited to that Policy.
PREMIUM CLASS: The risk classification that the Company assigns the Insured
based on the information in the application and any other Evidence of
Insurability considered by the Company. The Insured's Premium Class will affect
the cost of insurance charge and the amount of premium required to keep the
Policy in force.
PRINCIPAL OFFICE: The Company's office, located at 440 Lincoln Street,
Worcester, Massachusetts 01653.
PRO RATA ALLOCATION: In certain circumstances, you may specify from which
Sub-Account certain deductions will be made or to which Sub-Account Policy Value
will be allocated. If you do not, the Company will allocate the deduction or
Policy Value among the General Account and the Sub-Accounts in the same
proportion that the Policy Value in the General Account and the Policy Value in
each Sub-Account bear to the total Policy Value on the date of deduction or
allocation.
SEPARATE ACCOUNT: A separate account consists of assets segregated from the
Company's other assets. The investment performance of the assets of each
separate account is determined separately from the other assets of the Company.
The assets of a separate account which are equal to the reserves and other
contract liabilities are not chargeable with liabilities arising out of any
other business which the Company may conduct.
SUB-ACCOUNT: A division of the VEL II Account. Each Sub-Account invests
exclusively in the shares of a corresponding Fund of the Allmerica Investment
Trust, a corresponding Portfolio of the Variable Insurance Products Fund or
Variable Insurance Products Fund II, the T. Rowe Price International Stock
Portfolio of T. Rowe Price International Series, Inc. or the International
Equity Series of the Delaware Group Premium Fund, Inc.
SUM INSURED: The amount payable upon the death of the Insured, before the Final
Premium Payment Date, prior to deductions for Debt outstanding at the time of
the Insured's death, partial withdrawals and partial withdrawal charges, if any,
and any due and unpaid Monthly Deductions. The amount of the Sum Insured will
depend on the Sum Insured Option chosen, but will always be at least equal to
the Face Amount.
SURRENDER VALUE: The amount payable upon a full surrender of the Policy. It is
the Policy Value less any Debt and applicable surrender charges.
UNDERLYING FUNDS: The Funds of the Allmerica Investment Trust, the Portfolios of
the Variable Insurance Products Fund and the Variable Insurance Products Fund
II, the Portfolio of T. Rowe Price International Series, Inc. and the Series of
the Delaware Group Premium Fund, Inc. available under the Policies.
UNDERLYING INVESTMENT COMPANIES: Allmerica Investment Trust, Variable Insurance
Products Fund, Variable Insurance Products Fund II, T. Rowe Price International
Series, Inc. and Delaware Group Premium Fund, Inc.
6
<PAGE>
VALUATION DATE: A day on which the net asset value of the shares of any of the
Underlying Funds is determined and Accumulation Unit values of the Sub-Accounts
are determined. Valuation Dates currently occur on each day on which the New
York Stock Exchange is open for trading, and on such other days (other than a
day during which no payment, partial withdrawal, or surrender of a Policy is
received) when there is a sufficient degree of trading in an Underlying Fund's
securities such that the current net asset value of the Sub-Accounts may be
materially affected.
VALUATION PERIOD: The interval between two consecutive Valuation Dates.
VEL II ACCOUNT: A separate account of the Company to which the Policyowner may
make Net Premium allocations.
WRITTEN REQUEST: A request by the Policyowner in writing, satisfactory to the
Company.
YOU OR YOUR: The Policyowner, as shown in the application or the latest change
filed with the Company.
7
<PAGE>
SUMMARY
THE POLICY -- The flexible premium variable life policy (the "Policy") offered
by this prospectus allows you, subject to certain limitations, to make premium
payments in any amount and frequency. As long as the Policy remains in force, it
will provide for: (1) life insurance coverage on the named Insured; (2) Policy
Value; (3) surrender rights and partial withdrawal rights; (4) loan privileges;
and (5) in some cases, additional insurance benefits available by rider for an
additional charge.
The Policies are life insurance contracts, with death benefits, Policy Value,
and other features traditionally associated with life insurance. The Policies
are "variable" because, unlike the fixed benefits of ordinary whole life
insurance, the Policy Value will, and under certain circumstances the Death
Proceeds may, increase or decrease depending on the investment experience of the
Sub-Accounts of the VEL II Account. They are "flexible premium" policies,
because, unlike traditional insurance policies, there is no fixed schedule for
premium payments. Although you may establish a schedule of premium payments
("planned premium payments"), failure to make the planned premium payments will
not necessarily cause a Policy to lapse nor will making the planned premium
payments guarantee that a Policy will remain in force. Thus, you may, but are
not required to, pay additional premiums.
The Policy will remain in force until the Surrender Value is insufficient to
cover the next Monthly Deduction and loan interest accrued, if any, and a grace
period of 62 days has expired without adequate payment being made by you. During
the first 48 Policy months after the Date of Issue or the effective date of an
increase in Face Amount, the Policy will not lapse if the total premiums paid
less debt, partial withdrawals and withdrawal charges are equal to or exceed the
sum of the Minimum Monthly Factors for the number of months the Policy,
increase, or a Policy Change which causes a change in the Minimum Monthly Factor
has been in force. However, even during these periods making payments at least
equal to the Minimum Monthly Factors will not prevent the Policy from lapsing if
Debt equals or exceeds Policy Value less surrender charges.
SURRENDER CHARGES -- At any time that a Policy is in effect, a Policyowner may
elect to surrender the Policy and receive its Surrender Value. A surrender
charge is calculated upon issuance of the Policy and upon each increase in Face
Amount. The duration of the surrender charge is 15 years for issue Ages 0
through 50, grading down to 10 years for issue Ages 55 and above. The surrender
charge is only imposed if, during its duration, you request a full surrender or
a decrease in Face Amount.
The maximum surrender charge calculated upon issuance of the Policy is equal to
the sum of (a) plus (b) where (a) is a deferred administrative charge equal to
$8.50 per thousand dollars of the initial Face Amount and (b) is a deferred
sales charge of 49% of premiums received up to a maximum number of Guideline
Annual Premiums subject to the deferred sales charge that varies by issue Age
from 1.660714 (for Ages 0 through 55) to 0.948980 (for Age 80). In accordance
with limitations under state insurance regulations, the amount of the maximum
surrender charge will not exceed a specified amount per $1,000 of initial Face
Amount, as indicated in "APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER
CHARGES." The maximum surrender charge remains level for the first 40 Policy
months and reduces by 0.5% or more per month (depending on issue Age)
thereafter, as described in "APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER
CHARGES." If you surrender the Policy during the first two Policy years before
making premium payments associated with the initial Face Amount which are at
least equal to one Guideline Annual Premium, the actual surrender charge imposed
may be less than the maximum. See "THE POLICY -- Surrender" and "CHARGES AND
DEDUCTIONS -- Surrender Charge."
A separate surrender charge will apply to and is calculated for each increase in
Face Amount. The maximum surrender charge for the increase is equal to the sum
of (a) plus (b) where (a) is equal to $8.50 per thousand dollars of increase,
and (b) is a deferred sales charge, of 49% of premiums associated with the
increase, up to a maximum number of Guideline Annual Premiums (for the increase)
subject to the deferred sales charge that varies by Age (at the time of
increase) from 1.660714 (for Ages 0 through 55) to 0.948980 (for Age 80). In
accordance with limitations under state insurance
8
<PAGE>
regulations, the amount of the surrender charge will not exceed a specified
amount per $1,000 of increase, as indicated in "APPENDIX D -- CALCULATION OF
MAXIMUM SURRENDER CHARGES." As is true for the initial Face Amount, (a) is a
deferred administrative charge and (b) is a deferred sales charge. This maximum
surrender charge remains level for the first 40 Policy months following the
increase and reduces by 0.5% or more per month (depending on Age at increase)
thereafter, as described in "APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER
CHARGES." The actual surrender charge with respect to the increase may be less
than the maximum. See "THE POLICY -- Surrender" and "CHARGES AND DEDUCTIONS --
Surrender Charge."
In the event of a decrease in Face Amount, the surrender charge imposed is
proportional to the charge that would apply to a full surrender. See "THE POLICY
- -- Surrender" and "CHARGES AND DEDUCTIONS -- Surrender Charge."
TAX EXPENSE CHARGE -- A current charge of 2.25% of premiums will be deducted
from each premium payment to compensate the Company for premium taxes imposed by
various states and local jurisdictions and for federal taxes imposed for
deferred acquisition costs ("DAC tax"). The DAC tax deduction is a factor the
Company must use when calculating the maximum sales load it can charge under SEC
rules. See "CHARGES AND DEDUCTIONS -- Tax Expense Charge."
MONTHLY DEDUCTIONS FROM POLICY VALUE -- On the Date of Issue and each Monthly
Payment Date thereafter prior to the Final Premium Payment Date, certain charges
("Monthly Deductions") will be deducted from the Policy Value. The Monthly
Deduction consists of a charge for cost of insurance, a charge for the cost of
any additional benefits provided by rider, and a charge for administrative
expenses. You may instruct the Company to deduct the Monthly Deduction from one
specific Sub-Account. If you do not, the Company will make a Pro Rata Allocation
of the charge. No Monthly Deductions are made on or after the Final Premium
Payment Date.
The monthly cost of insurance charge is determined by multiplying the Insurance
Amount at Risk (the Sum Insured minus the Policy Value) for each Policy month by
the applicable cost of insurance rate or rates. The Insurance Amount at Risk
will be affected by any decreases or increases in the Face Amount.
As noted above, certain additional insurance rider benefits are available under
the Policy for an additional monthly charge. See "APPENDIX A -- Optional
Benefits."
The monthly administrative charge is described in "CHARGES AND DEDUCTIONS --
Monthly Deduction From Policy Value."
POLICY ADMINISTRATIVE CHARGES -- Each of the charges listed below is designed to
reimburse the Company for actual Policy administrative costs incurred. None of
these charges is designed to result in a profit to the Company.
DEFERRED ADMINISTRATIVE CHARGE -- A component of the surrender charge is a
charge for administrative expenses. This deferred administrative charge is $8.50
per thousand dollars of the initial Face Amount or of an increase in Face
Amount. The charge is designed to reimburse the Company for administrative costs
associated with product research and development, underwriting, policy
administration, decreasing the Face Amount, and surrendering a Policy. Because
the maximum surrender charge reduces by 0.5% or more per month (depending on
issue Age) after the 40th Policy month from the Date of Issue or the effective
date of an increase in Face Amount, in certain situations some or all of the
deferred administrative charge may not be assessed upon surrender of the Policy.
See "THE POLICY -- Surrender" and "CHARGES AND DEDUCTIONS -- Surrender Charge."
MONTHLY ADMINISTRATIVE CHARGES -- A component of the Monthly Deduction from
Policy Value is a charge for administrative expenses. Prior to the Final Premium
Payment Date, the charge is $5 per month. The charges are designed to reimburse
the Company for the costs associated with issuing and administering the
Policies, such as processing premium payments, policy loans and loan repayments,
9
<PAGE>
change in Sum Insured Options, and death claims. These charges also help cover
the cost of providing annual statements and responding to Policyholder
inquiries. See "CHARGES AND DEDUCTIONS -- Monthly Deduction From Policy Value."
TRANSACTION CHARGE ON PARTIAL WITHDRAWALS -- A transaction charge, which is the
smaller of 2% of the amount withdrawn or $25, is assessed at the time of each
partial withdrawal to reimburse the Company for the cost of processing the
withdrawal. In addition to the transaction charge, a partial withdrawal charge
may also be made under certain circumstances. See "CHARGES AND DEDUCTIONS --
Charges On Partial Withdrawal."
CHARGE FOR INCREASE IN FACE AMOUNT -- For each increase in Face Amount, a charge
of $50 will be deducted from Policy Value. This charge is designed to reimburse
the Company for underwriting and administrative costs associated with the
increase. See "THE POLICY -- Change In Face Amount" and "CHARGES AND DEDUCTIONS
- -- Charge For Increase In Face Amount."
TRANSFER CHARGE -- The first twelve transfers of Policy Value in a Policy year
will be free of charge. Thereafter, with certain exceptions, a transfer charge
of $10 will be imposed for each transfer request to reimburse the Company for
the costs of processing the transfer. See "THE POLICY -- Transfer Privilege" and
"CHARGES AND DEDUCTIONS -- Transfer Charges."
OTHER ADMINISTRATIVE CHARGES -- The Company reserves the right to impose a
charge for the administrative costs associated with changing the Net Premium
allocation instructions, for changing the allocation of any Monthly Deductions
among the various Sub-Accounts, or for a projection of values. See "CHARGES AND
DEDUCTIONS -- Other Administrative Charges."
CHARGES AGAINST THE VEL II ACCOUNT -- In the first ten policy years, a daily
charge equivalent to an effective annual rate of 0.80% of the average daily net
asset value of each Sub-Account of the VEL II Account is imposed to compensate
the Company for its assumption of certain mortality and expense risks and for
administrative costs associated with the VEL II Account. The rate is currently
0.65% for the mortality and expense risk (and is guaranteed never to exceed
1.275%)and 0.15% for the VEL II Account administrative charge (guaranteed never
to exceed 0.25%). The administrative charge is eliminated after the tenth Policy
year. See "CHARGES AND DEDUCTIONS -- Charges Against Assets Of The VEL II
Account."
CHARGES OF THE UNDERLYING INVESTMENT COMPANIES -- In addition to the charges
described above, certain fees and expenses are deducted from the assets of the
Underlying Investment Companies. See "CHARGES AND DEDUCTIONS -- Charges Against
Assets Of The VEL II Account." The levels of fees and expenses vary among the
Underlying Investment Companies.
POLICY VALUE AND SURRENDER VALUE -- The Policy Value is the total amount
available for investment under a Policy at any time. It is the sum of the value
of all Accumulation Units in the Sub-Accounts of the VEL II Account and all
accumulations in the General Account of the Company credited to the Policy. The
Policy Value reflects the amount and frequency of Net Premiums paid, charges and
deductions imposed under the Policy, interest credited to accumulations in the
General Account, investment performance of the Sub-Account(s) to which Policy
Value has been allocated, and partial withdrawals. The Policy Value may be
relevant to the computation of the Death Proceeds. You bear the entire
investment risk for amounts allocated to the VEL II Account. The Company does
not guarantee a minimum Policy Value. See "SUMMARY -- Minimum Monthly Factor."
The Surrender Value will be the Policy Value less any Debt and applicable
surrender charges. The Surrender Value is relevant, for example, to the
continuation of the Policy and in the computation of the amounts available upon
partial withdrawals, Policy loans or surrender.
DEATH PROCEEDS -- The Policy provides for the payment of certain Death Proceeds
to the named Beneficiary upon the death of the Insured. Prior to the Final
Premium Payment Date, the Death Proceeds will be equal to the Sum Insured,
reduced by any outstanding Debt, partial withdrawals, partial withdrawal
charges, and any Monthly Deductions due and not yet deducted through the policy
10
<PAGE>
month in which the Insured dies. Two Sum Insured Options are available. Under
Option 1, the Sum Insured is the greater of the Face Amount of the Policy or the
Guideline Minimum Sum Insured. Under Option 2, the Sum Insured is the greater of
the Face Amount of the Policy plus the Policy Value or the Guideline Minimum Sum
Insured. The Guideline Minimum Sum Insured is equivalent to a percentage
(determined each month based on the Insured's Age) of the Policy Value. On or
after the Final Premium Payment Date, the Death Proceeds will equal the
Surrender Value. See "THE POLICY -- Death Proceeds."
The Death Proceeds under the Policy may be received in a lump sum or under one
of the Payment Options described in the Policy. See "APPENDIX B -- Payment
Options."
FLEXIBILITY TO ADJUST SUM INSURED -- Subject to certain limitations, you may
adjust the Sum Insured, and thus the Death Proceeds, at any time prior to the
Final Premium Payment Date, by increasing or decreasing the Face Amount of the
Policy. Any change in the Face Amount will affect the monthly cost of insurance
charges and the amount of the surrender charge. If the Face Amount is decreased,
a pro rata surrender charge may be imposed. The Policy Value is reduced by the
amount of the charge. See "THE POLICY -- Change In Face Amount."
The minimum increase in Face Amount is $10,000, and any increase may also
require additional Evidence of Insurability satisfactory to the Company. The
increase is subject to a "free look period" and, during the first 24 months
after the increase, to a conversion privilege. See "THE POLICY -- Free Look
Period -- Conversion Privileges."
ADDITIONAL INSURANCE BENEFITS -- You have the flexibility to add additional
insurance benefits by rider. These include the Waiver of Premium Rider,
Accidental Death Benefit Rider, Guaranteed Insurability Rider, Other Insured
Rider, Children's Insurance Rider, Exchange Option Rider and Living Benefits
Rider. See "APPENDIX A -- Optional Benefits."
The cost of these optional insurance benefits will be deducted from Policy Value
as part of the Monthly Deduction. See "CHARGES AND DEDUCTIONS -- Monthly
Deduction From Policy Value."
POLICY ISSUANCE -- If at the time of application you make a payment equal to at
least one Minimum Monthly Factor for the Policy as applied for, the Company will
provide conditional insurance, equal to the amount applied for but not to exceed
$500,000. If the application is approved, the Policy will be issued as of the
date the terms of the conditional insurance agreement are met. If you do not
wish to make any payment at the time of application, insurance coverage will not
be in force until delivery of the Policy and payment of sufficient premium
during the lifetime of the Insured.
If any premiums are paid prior to the issuance of the Policy, such premiums will
be held in the Company's General Account. If your application is approved and
the Policy is issued and accepted, the initial premiums held in the General
Account will be credited with interest at a specified rate beginning not later
than the date of receipt of the premiums at the Company's Principal Office. IF A
POLICY IS NOT ISSUED AND ACCEPTED, THE INITIAL PREMIUMS WILL BE RETURNED TO YOU
WITHOUT INTEREST.
Upon completion of issuance procedures, delivery of the Policy, and receipt of
any additional premiums, if less than $10,000 of initial Net Premiums have been
received by the Company, such Net Premiums will be allocated to the Sub-Accounts
according to your instructions. If initial Net Premiums equal or exceed $10,000,
or if the Policy provides for planned premium payments during the first year
equal to or exceeding $10,000 annually, $5,000 semi-annually, $2,500 quarterly
or $1,000 monthly, the entire Net Premium plus any interest earned will be
allocated to the Sub-Accounts upon return to the Company of a Delivery Receipt.
See "THE POLICY -- Application For A Policy."
MINIMUM MONTHLY FACTOR -- The Policy is guaranteed not to lapse prior to the
49th Monthly Deduction after Date of Issue or the effective date of an increase
in the Face Amount, if you make premium payments, less partial withdrawals and
partial withdrawal charges, at least equal to the sum of the Minimum Monthly
Factors for the number of months the Policy increase, or Policy Change
11
<PAGE>
which causes a change in the Minimum Monthly Factor, has been in force. Policy
Changes which cause a change in the Minimum Monthly Factor are changes in Face
Amount and the addition or deletion of a rider. However, at all other times,
payments of such premiums do not guarantee that the Policy will remain in force.
See "THE POLICY -- Premium Payments." Moreover, even during the 48 month
periods, if Debt exceeds Policy Value less surrender charges, then making
payments at least equal to the Minimum Monthly Factors will not prevent the
Policy from lapsing.
ALLOCATION OF NET PREMIUMS -- Net premiums are the premiums paid less the tax
expense charge. Net premiums may be allocated to one or more Sub-Accounts of the
VEL II Account, to the General Account, or to any combination of Accounts. You
bear the investment risk of Net Premiums allocated to the Sub-Accounts.
Allocations may be made to no more than seven Sub-Accounts at any one time. The
minimum allocation is 1% of Net Premium. All allocations must be in whole
numbers and must total 100%. See "THE POLICY -- Allocation Of Net Premiums."
Premiums allocated to the Company's General Account will earn a fixed rate of
interest. Net premiums and minimum interest are guaranteed by the Company. For
more information, see "MORE INFORMATION ABOUT THE GENERAL ACCOUNT."
INVESTMENT OPTIONS -- The Policies permit Net Premiums to be allocated either to
the Company's General Account or to the VEL II Account. The VEL II Account is
currently comprised of eighteen Sub-Accounts ("Sub-Accounts"). Each Sub-Account
invests exclusively in a corresponding Underlying Fund of the Allmerica
Investment Trust ("Trust") managed by Allmerica Investment, the Variable
Insurance Products Fund ("Fidelity VIP") or the Variable Insurance Products Fund
II ("Fidelity VIP II") managed by Fidelity Management, T. Rowe Price
International Series, Inc. ("T. Rowe Price") managed by Rowe Price-Fleming
International, Inc. with respect to the International Stock Portfolio or the
Delaware Group Premium Fund, Inc. ("DGPF") managed by Delaware International
with respect to the International Equity Series. The Policies permit you to
transfer Policy Value among the available Sub-Accounts and between the
Sub-Accounts and the General Account of the Company, subject to certain
limitations described under "THE POLICY -- Transfer Privilege."
The Trust, Fidelity VIP, Fidelity VIP II, T. Rowe Price and DGPF are open-end,
diversified series management investment companies. Eleven different Underlying
Funds of the Trust (each a "Fund") are available under the Policies: the Growth
Fund, Investment Grade Income Fund, Money Market Fund, Equity Index Fund,
Government Bond Fund, Select International Equity Fund, Select Aggressive Growth
Fund, Select Capital Appreciation Fund, Select Growth Fund, Select Growth and
Income Fund and Small Cap Value Fund. Four different Underlying Funds of
Fidelity VIP (each a "Portfolio") are available under the Policies: the Fidelity
VIP High Income Portfolio, Fidelity VIP Equity-Income Portfolio, Fidelity VIP
Growth Portfolio and Fidelity VIP Overseas Portfolio. One Underlying Fund of
Fidelity VIP II ("Portfolio") is available under the Policies: the Fidelity VIP
II Asset Manager Portfolio. One Underlying Fund of T. Rowe Price ("Portfolio")
is available under the Policies: the T. Rowe Price International Stock
Portfolio. One Underlying Fund of DGPF ("Series") is available under the
Policies: the International Equity Series.
Each of the Underlying Funds has its own investment objectives. However, certain
Portfolios have investment objectives similar to certain Funds or Series.
The value of each Sub-Account will vary daily depending upon the performance of
the Underlying Fund in which it invests. Each Sub-Account reinvests dividends or
capital gains distributions received from an Underlying Fund in additional
shares of that Underlying Fund.
There can be no assurance that the investment objectives of the Underlying Funds
can be achieved. For more information, see "DESCRIPTION OF THE COMPANY, THE VEL
II ACCOUNT, ALLMERICA INVESTMENT TRUST, VARIABLE INSURANCE PRODUCTS FUND,
VARIABLE INSURANCE PRODUCTS FUND II, T. ROWE PRICE INTERNATIONAL SERIES, INC.
AND DELAWARE GROUP PREMIUM FUND, INC."
12
<PAGE>
FREE LOOK PERIOD -- The Policy provides for an initial Free Look Period. You may
cancel the Policy by mailing or delivering it to the Principal Office or to an
agent of the Company on or before the latest of (a) 45 days after the
application for the Policy is signed, (b) 10 days after you receive the Policy,
or (c) 10 days after the Company mails or personally delivers a Notice of
Withdrawal Rights to you. Upon returning the Policy you will receive a refund
equal to the premiums paid. A free look privilege also applies after a requested
increase in Face Amount. See "THE POLICY -- Free Look Period."
CONVERSION PRIVILEGES -- During the first 24 Policy months after the Date of
Issue, or within 60 days after the later of a material change in the investment
policy of a Sub-Account or notice thereof, subject to certain restrictions you
may convert this Policy to a flexible premium fixed adjustable life insurance
policy. The new policy, including any riders then in effect, will have the same
face amount, issue age, date of issue, and risk classifications as the original
Policy. A different conversion privilege is in effect for 24 Policy months after
the date of an increase in Face Amount. See "THE POLICY -- Conversion
Privileges."
PARTIAL WITHDRAWAL -- After the first Policy year, you may make partial
withdrawals in a minimum amount of $500 from the Policy Value. Under Option 1,
the Face Amount is reduced by the amount of the partial withdrawal, and a
partial withdrawal will not be allowed if it would reduce the Face Amount below
$40,000.
A transaction charge which is described in "CHARGES AND DEDUCTIONS -- Charges On
Partial Withdrawal," will be assessed to reimburse the Company for the cost of
processing each partial withdrawal. A partial withdrawal charge may also be
imposed upon a partial withdrawal. Generally, amounts withdrawn during each
Policy year in excess of 10% of the Policy Value ("excess withdrawal") are
subject to the partial withdrawal charge. The partial withdrawal charge is equal
to 5% of the excess withdrawal up to the surrender charge on the date of
withdrawal. If no surrender charge is applicable at the time of withdrawal, no
partial withdrawal charge will be deducted. The Policy's outstanding surrender
charge will be reduced by the amount of the partial withdrawal charge deducted.
See "THE POLICY -- Partial Withdrawal" and "CHARGES AND DEDUCTIONS -- Charges On
Partial Withdrawal."
LOAN PRIVILEGE -- You may borrow against the Policy Value. The total amount you
may borrow is the Loan Value. Loan Value in the first Policy Year is 75% of an
amount equal to Policy Value less surrender charge, Monthly Deductions, and
interest on Debt to the end of the Policy year. Thereafter, Loan Value is 90% of
an amount equal to Policy Value less the surrender charge.
Policy loans will be allocated among the General Account and the Sub-Accounts in
accordance with your instructions. If no allocation is made by you, the Company
will make a Pro Rata Allocation among the Accounts. In either case, Policy Value
equal to the Policy loan will be transferred from the appropriate Sub-Account(s)
to the General Account, and will earn monthly interest at an effective annual
rate of at least 6%. Therefore, a Policy loan may have a permanent impact on the
Policy Value even though it is eventually repaid. Although the loan amount is a
part of the Policy Value, the Death Proceeds will be reduced by the amount of
outstanding Debt at the time of death.
Policy loans will bear interest at a fixed rate of 8% per year, due and payable
in arrears at the end of each Policy year. If interest is not paid when due, it
will be added to the loan balance. Policy loans may be repaid at any time. You
must notify the Company if a payment is a loan repayment; otherwise, it will be
considered a premium payment. Any partial or full repayment of Debt by you will
be allocated to the General Account or Sub-Accounts in accordance with your
instructions. If you do not specify an allocation, the Company will allocate the
loan repayment in accordance with your most recent premium allocation
instructions. See "POLICY LOANS."
POLICY LAPSE AND REINSTATEMENT -- The failure to make premium payments will not
cause a Policy to lapse unless: (a) the Surrender Value is insufficient to cover
the next Monthly Deduction plus loan interest accrued, if any, or (b) Debt
exceeds Policy Value less surrender charges. A 62-day grace period applies to
each situation. Except for the situation described in (b) above, the Policy will
not
13
<PAGE>
lapse prior to the 49th Monthly Deduction following the Date of Issue or the
effective date of an increase in Face Amount, if you make premium payments, less
Debt, partial withdrawals and partial withdrawal charges, at least equal to the
sum of the Minimum Monthly Factors for the number of months the Policy,
increase, or Policy Change which causes a change in the Minimum Monthly Factor,
has been in force. Subject to certain conditions (including Evidence of
Insurability showing that the Insured is insurable according to the Company's
underwriting rules and the payment of sufficient premium), a Policy may be
reinstated at any time within 3 years after the expiration of the grace period
and prior to the Final Premium Payment Date. The Company Reserves the right to
increase the Minimum Monthly Factor upon reinstatement. See "POLICY TERMINATION
AND REINSTATEMENT."
TAX TREATMENT -- A Policy is generally subject to the same federal income tax
treatment as a conventional fixed benefit life insurance policy. Under current
tax law, to the extent there is no change in benefits, you will be taxed on
Policy Value withdrawn from the Policy only to the extent that the amount
withdrawn exceeds the total premiums paid. Withdrawals in excess of premiums
paid will be treated as ordinary income. During the first 15 Policy years,
however, an "interest first" rule applies to any distribution of cash that is
required under Section 7702 of the Internal Revenue Code because of a reduction
in benefits under the Policy. Death Proceeds under the Policy are excludable
from the gross income of the Beneficiary, but in some circumstances the Death
Proceeds or the Policy Value may be subject to federal estate tax. See "FEDERAL
TAX CONSIDERATIONS -- Taxation Of The Policies."
A Policy offered by this prospectus may be considered a "modified endowment
contract" if it fails a "7 - pay" test. A Policy fails to satisfy the 7 - pay
test if the cumulative premiums paid under the Policy at any time during the
first seven policy years exceeds the sum of the net level premiums that would
have been paid, had the Policy provided for paid-up future benefits after the
payment of seven level premiums. If the Policy is considered a modified
endowment contract, all distributions (including policy loans, partial
withdrawals, surrenders or assignments) will be taxed on an "income-first"
basis. In addition, with certain exceptions, an additional 10% penalty will be
imposed on the portion of any distribution that is includible in income. For
more information, see "FEDERAL TAX CONSIDERATIONS -- Modified Endowment
Contracts."
------------------------
The purpose of the Policy is to provide insurance protection for the Beneficiary
named therein. This Summary is intended to provide only a very brief overview of
the more significant aspects of the Policy. Further detail is provided in this
prospectus and in the Policy. No claim is made that the Policy is in any way
similar or comparable to a systematic investment plan of a mutual fund. The
Policy together with its attached application constitutes the entire agreement
between the Company and you.
14
<PAGE>
PERFORMANCE INFORMATION
The Policies were first offered to the public in 1994. However, the Company may
advertise "Total Return" and "Average Annual Total Return" performance
information based on the periods that the Underlying Funds have been in
existence. The results for any period prior to the Policies being offered will
be calculated as if the Policies had been offered during that period of time,
with all charges assumed to be those applicable to the Sub-Accounts, the
Underlying Funds, and (in Table I) under a "representative" Policy that is
surrendered at the end of the applicable period. FOR MORE INFORMATION ON CHARGES
UNDER THE POLICIES, SEE CHARGES AND DEDUCTIONS.
Performance information 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 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 life 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 Morningstar, 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. Unmanaged indices may assume the reinvestment of
dividends but generally do not reflect deductions for administrative and
management costs and expenses.
The Company may provide information on various topics of interest to
Policyowners and prospective Policyowners in sales literature, periodic
publications or other materials These topics may include the relationship
between sectors of the economy and the economy as a whole and its effect on
various securities markets, investment strategies and techniques (such as value
investing, market timing, dollar cost averaging, asset allocation, constant
ratio transfer and account rebalancing), the advantages and disadvantages of
investing in tax-deferred and taxable investments, customer profiles and
hypothetical purchase and investment scenarios, financial management and tax and
retirement planning, and investment alternatives to certificates of deposit and
other financial instruments. In each Table below, "One-Year Total Return" refers
to the total of the income generated by a sub-account, based on certain charges
and assumptions as described in the respective tables, for the one-year period
ended December 31, 1995. "Average Annual Total Return" is based on the same
charges and assumptions, but reflects the hypothetical annually compounded
return that would have produced the same cumulative return if the Sub-Account's
performance had been constant over the entire period. Because average annual
total returns tend to smooth out variations in annual performance return, they
are not the same as actual year-by-year results.
PERFORMANCE INFORMATION REFLECTS ONLY THE PERFORMANCE OF A HYPOTHETICAL
INVESTMENT DURING THE PARTICULAR TIME PERIOD ON WHICH THE CALCULATIONS ARE
BASED. ONE-YEAR TOTAL RETURN AND AVERAGE ANNUAL TOTAL RETURN FIGURES ARE BASED
ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
PERFORMANCE INFORMATION SHOULD BE CONSIDERED IN LIGHT OF THE INVESTMENT
OBJECTIVES AND POLICIES, CHARACTERISTICS AND QUALITY OF THE PORTFOLIO OF THE
UNDERLYING FUND IN WHICH A 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.
15
<PAGE>
TABLE I: SUB-ACCOUNT PERFORMANCE
NET OF ALL CHARGES AND ASSUMING SURRENDER OF THE POLICY
The following performance information is based on the periods that the
Underlying Funds have been in existence. The data is net of expenses of the
Underlying Funds, all Sub-Account charges, and all Policy charges (including
surrender charges) for a representative Policy. It is assumed that the Insured
is male, Age 36, standard (nonsmoker) Premium Class, that the Face Amount of the
Policy is $250,000, that an annual premium payment of $3,000 (approximately one
Guideline Annual Premium) was made at the beginning of each Policy year, that
ALL premiums were allocated to EACH Sub-Account individually, and that there was
a full surrender of the Policy at the end of the applicable period.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN AS OF 12/31/95
--------------------------------------------------
SUB- UNDERLYING ONE-YEAR SINCE YEARS SINCE
ACCOUNT FUND TOTAL RETURN 3 YEARS 5 YEARS INCEPTION INCEPTION*
- --------- ------------------------------------------ ------------ ---------- ---------- ----------- -------------
<C> <S> <C> <C> <C> <C> <C>
1 Growth -84.93% -25.38% 1.78% 10.18% 10.00
2 Investment Grade -98.43% -31.54% -6.31% 3.75% 10.00
3 Money Market -100.00% -37.67% -13.33% -0.31% 10.00
4 Equity Index -81.88% -22.09% -6.06% 3.44% 5.26
5 Government Bond -100.00% -34.29% N/A -14.18% 4.35
6 Select Aggressive Growth -85.40% -20.76% N/A -9.39% 3.36
7 Select Growth -92.35% -32.83% N/A -23.37% 3.36
8 Select Growth and Income -87.17% -24.22% N/A -21.01% 3.36
9 Small Cap Value -98.65% N/A N/A -33.93% 2.67
11 Select International Equity -96.82% N/A N/A -64.07% 1.67
12 Select Cap. Appreciation N/A N/A N/A -84.95% 0.67
102 Fidelity VIP High Income -95.84% -24.96% 4.86% 6.28% 10.00
103 Fidelity VIP Equity-Income -82.86% -15.22% 7.71% 7.34% 9.23
104 Fidelity VIP Growth -82.62% -18.32% 7.06% 9.00% 9.23
105 Fidelity VIP Overseas -100.00% -21.19% -8.58% 0.26% 8.92
106 Fidelity VIP II Asset Manager -99.23% -28.83% -2.67% 0.35% 6.32
150 T. Rowe Price International Stock -100.00% N/A N/A -69.97% 1.58
207 DGPF International Equity -100.00% N/A N/A -28.14% 3.17
</TABLE>
TABLE II: SUB-ACCOUNT PERFORMANCE
EXCLUDING MONTHLY POLICY CHARGES AND SURRENDER CHARGES
The following performance information is based on the periods that the
Underlying Funds have been in existence. The performance information is net of
total Underlying Fund expenses, all Sub-Account charges, and premium tax and
expense charges. THE DATA DOES NOT REFLECT MONTHLY CHARGES UNDER THE POLICIES OR
SURRENDER CHARGES. It is assumed that an annual premium payment of $3,000
(approximately one Guideline Annual Premium) was made at the beginning of each
Policy year and that ALL premiums were allocated to EACH Sub-Account
individually.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN AS OF 12/31/95
--------------------------------------------------
SUB- UNDERLYING ONE-YEAR SINCE YEARS SINCE
ACCOUNT FUND TOTAL RETURN 3 YEARS 5 YEARS INCEPTION INCEPTION*
- --------- ------------------------------------------ -------------- ---------- ---------- ----------- -------------
<C> <S> <C> <C> <C> <C> <C>
1 Growth 31.74% 11.46% 15.44% 14.45% 10.00
2 Investment Grade 16.90% 7.34% 9.01% 8.66% 10.00
3 Money Market 4.99% 3.42% 3.71% 5.11% 10.00
4 Equity Index 35.09% 13.74% 9.20% 15.99% 5.26
5 Government Bond 12.16% 5.56% N/A 6.86% 4.35
6 Select Aggressive Growth 31.22% 14.67% N/A 19.20% 3.36
7 Select Growth 23.59% 6.50% N/A 9.13% 3.36
8 Select Growth and Income 29.28% 12.26% N/A 10.77% 3.36
9 Small Cap Value 16.66% N/A N/A 9.26% 2.67
11 Select International Equity 18.67% N/A N/A 8.14% 1.67
12 Select Capital Appreciation N/A N/A N/A 38.81% 0.67
102 Fidelity VIP High Income 19.75% 11.75% 17.97% 10.91% 10.00
103 Fidelity VIP Equity-Income 34.01% 18.64% 20.35% 12.42% 9.23
104 Fidelity VIP Growth 34.28% 16.40% 19.81% 13.91% 9.23
105 Fidelity VIP Overseas 8.80% 14.37% 7.26% 6.45% 8.92
106 Fidelity VIP II Asset Manager 16.02% 9.13% 11.86% 10.35% 6.32
150 T. Rowe Price International Stock 10.29% N/A N/A 6.45% 1.58
207 DGPF International Equity 12.81% N/A N/A 7.84% 3.17
</TABLE>
*If less than 10 years. The inception dates for the Underlying Funds are:
4/29/85 for Growth, Investment Grade and Money Market; 9/28/90 for Equity
Index; 8/26/91 for Government Bond; 8/21/92 for Select Aggressive Growth,
Select Growth, and Select Growth and Income; 4/30/93 for Small Cap Value;
5/01/94 for Select International Equity; 4/28/95 for Select Capital
Appreciation; 10/09/86 for Fidelity VIP Equity-Income and Fidelity VIP Growth;
9/19/85 for Fidelity VIP High Income; 1/28/87 for Fidelity VIP Overseas;
9/06/89 for Fidelity VIP II Asset Manager; 10/29/92 for DGPF International
Equity; and 3/31/94 for the T. Rowe Price International Stock.
16
<PAGE>
DESCRIPTION OF THE COMPANY, THE VEL II ACCOUNT, ALLMERICA INVESTMENT TRUST,
VARIABLE INSURANCE PRODUCTS FUND, VARIABLE INSURANCE PRODUCTS FUND II,
T. ROWE PRICE INTERNATIONAL SERIES, INC.
AND DELAWARE GROUP PREMIUM FUND, INC.
THE COMPANY -- The Company organized under the laws of Massachusetts in 1844, is
the fifth oldest life insurance company in America. As of December 31, 1995, the
company and its subsidiaries had over $11 billion in combined assets and over
$35.2 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 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 VEL II ACCOUNT -- The VEL II Account was established pursuant to a vote of
the Board of Directors of the Company on August 20, 1991. The VEL II Account is
registered with the Securities and Exchange Commission ("Commission") as a unit
investment trust under the Investment Company Act of 1940 ("1940 Act"). Such
registration does not involve the supervision of its management or investment
practices or policies of the VEL II Account or the Company by the Commission.
The assets used to fund the variable portion of the Policies are set aside in
the VEL II Account and are kept separate and apart from the general assets of
the Company. Under Massachusetts law, assets equal to the reserves and other
liabilities of the VEL II Account may not be charged with any liabilities
arising out of any other business of the Company. The VEL II Account currently
has sixteen Sub-Accounts. 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 or the
other Sub-Accounts. Each Sub-Account invests exclusively in a corresponding
investment portfolio ("Underlying Fund") of the Allmerica Investment Trust, the
Variable Insurance Products Fund, the Variable Insurance Products Fund II, T.
Rowe Price International Series, Inc. or the Delaware Group Premium Fund, Inc.
("Underlying Investment Companies"). The assets of each Underlying Fund are held
separate from the assets of the other Underlying Funds. Each Underlying Fund
operates as a separate investment vehicle and the income or losses of one
Underlying Fund generally have no effect on the investment performance of
another Underlying Fund. Shares of each Underlying Fund are not offered to the
general public but solely to separate accounts of life insurance companies, such
as the VEL II Account. Each Sub-Account has two sub-divisions. One sub-division
applies to Policies during their first ten Policy years, which are subject to a
VEL II Account administrative charge. See "CHARGES AND DEDUCTIONS -- Charges
Against Assets of the VEL II Account." Thereafter, such Policies are
automatically allocated to the second sub-division to account for the
elimination of the VEL II Account administrative charge.
The Company reserves the right, subject to compliance with applicable law, to
change the names of the Sub-Accounts and VEL II Account.
ALLMERICA INVESTMENT TRUST -- Allmerica Investment Trust (the "Trust") is an
open-end, diversified, management investment company registered with the
Commission 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 by the Company 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
17
<PAGE>
by the Company and other affiliated insurance companies. Eleven investment
portfolios ("Funds") of the Trust are available under the Policies, each issuing
a series of shares: the Growth Fund, Investment Grade Income Fund, Money Market
Fund, Equity Index Fund, Government Bond Fund, Select International Equity Fund,
Select Aggressive Growth Fund, Select Capital Appreciation Fund, Select Growth
Fund, Select Growth and Income Fund, and Small Cap Value Fund.
Allmerica Investment serves as investment adviser of the Trust and has entered
into sub-advisory agreements with other investment managers ("Sub-Advisers") who
manage the investments of the Funds. See "INVESTMENT ADVISORY SERVICES TO THE
TRUST."
VARIABLE INSURANCE PRODUCTS FUND -- Variable Insurance Products Fund ("Fidelity
VIP"), managed by Fidelity Management & Research Company ("Fidelity
Management"), is an open-end, diversified, management investment company
organized as a Massachusetts business trust on November 13, 1981 and registered
with the Commission under the 1940 Act. Four of its investment portfolios are
available under the Policies: Fidelity VIP High Income Portfolio, Fidelity VIP
Equity-Income Portfolio, Fidelity VIP Growth Portfolio and Fidelity VIP Overseas
Portfolio.
Various Fidelity companies perform certain activities required to operate
Fidelity VIP. Fidelity Management, a registered investment adviser under the
Investment Advisers Act of 1940, is one of America's largest investment
management organizations and has its principal business address at 82 Devonshire
Street, Boston MA. It is composed of a number of different companies, which
provide a variety of financial services and products. Fidelity Management is the
original Fidelity company, founded in 1946. It provides a number of mutual funds
and other clients with investment research and portfolio management services.
The Portfolios of Fidelity VIP as part of their operating expenses pay an
investment management fee to Fidelity Management. See "INVESTMENT ADVISORY
SERVICES TO FIDELITY VIP AND FIDELITY VIP II."
VARIABLE INSURANCE PRODUCTS FUND II -- Variable Insurance Products Fund II
("Fidelity VIP II"), managed by Fidelity Management (see discussion under
"VARIABLE INSURANCE PRODUCTS FUND"), is an open-end , diversified, management
investment company organized as a Massachusetts business trust on March 21, 1988
and registered with the Commission under the 1940 Act. One of its investment
portfolios is available under the Policies: the Asset Manager Portfolio.
T. ROWE PRICE INTERNATIONAL SERIES, INC. -- T. Rowe Price International Series,
Inc. ("T. Rowe Price"), managed by Rowe Price-Fleming International, Inc.
("Price-Fleming") (See "INVESTMENT ADVISORY SERVICES TO T. ROWE PRICE"), is an
open-end, diversified, management investment company organized as a Maryland
corporation in 1994 and registered with the Commission under the 1940 Act. One
of its investment portfolios is available under the Policies: the International
Stock Portfolio.
DELAWARE GROUP PREMIUM FUND, INC. -- Delaware Group Premium Fund, Inc. ("DGPF")
is an open-end, diversified management investment company registered with the
Commission under the 1940 Act. Such registration does not involve supervision by
the Commission of the investments or investment policy of DGPF or its separate
investment series.
DGPF was established to provide a vehicle for the investment of assets of
various separate accounts supporting variable insurance policies. One investment
portfolio ("Series") is available under the Policies: the International Equity
Series.
The Investment adviser for the International Equity Series is Delaware
International Advisers Ltd. ("Delaware International"). See "INVESTMENT ADVISORY
SERVICES TO DGPF."
18
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
A summary of investment objectives of each of the Underlying Funds is set forth
below. MORE DETAILED INFORMATION REGARDING THE INVESTMENT OBJECTIVES,
RESTRICTIONS AND RISKS, EXPENSES PAID BY THE UNDERLYING FUNDS AND OTHER RELEVANT
INFORMATION REGARDING THE UNDERLYING INVESTMENT COMPANIES MAY BE FOUND IN THEIR
RESPECTIVE PROSPECTUSES, WHICH ACCOMPANY THIS PROSPECTUS AND SHOULD BE READ
CAREFULLY BEFORE INVESTING. The Statements of Additional Information of the
Underlying Funds are available upon request. There can be no assurance that the
investment objectives of the Underlying funds can be achieved.
GROWTH FUND (SUB-ACCOUNT 1) -- 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.
INVESTMENT GRADE INCOME FUND (SUB-ACCOUNT 2) -- 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 realized and unrealized capital gains) as is consistent with prudent
investment management.
MONEY MARKET FUND (SUB-ACCOUNT 3) -- The Money Market Fund of the Trust is
invested in a diversified portfolio of high-quality, short-term debt instruments
with the objective of obtaining maximum current income consistent with the
preservation of capital and liquidity.
EQUITY INDEX FUND (SUB-ACCOUNT 4) -- The Equity Index Fund of the Trust seeks to
provide investment results that correspond generally to the composite price and
yield performance of United States publicly traded common stocks. The Equity
Index Fund seeks to achieve its objective by attempting to replicate the
composite price and yield performance of the Standard & Poor's 500 Composite
Stock Price Index.
GOVERNMENT BOND FUND (SUB-ACCOUNT 5) -- 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.
SELECT AGGRESSIVE GROWTH FUND (SUB-ACCOUNT 6) -- 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.
SELECT GROWTH FUND (SUB-ACCOUNT 7) -- The Select Growth Fund of the Trust seeks
to achieve growth of capital by investing in a diversified portfolio consisting
primarily of common stocks selected on the basis of their long-term growth
potential.
SELECT GROWTH AND INCOME FUND (SUB-ACCOUNT 8) -- The Select Growth and Income
Fund of the Trust seeks a combination of long-term growth of capital and current
income. The Fund will invest primarily in dividend-paying common stocks and
securities convertible into common stocks.
SMALL CAP VALUE FUND (SUB-ACCOUNT 9) -- The Small Cap Value Fund of the Trust
seeks long-term growth by investing principally in a diversified portfolio of
common stocks of smaller, faster-growing companies considered to be attractively
valued in the smaller company sector of the market.
SELECT INTERNATIONAL EQUITY FUND (SUB-ACCOUNT 11) -- 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 CAPITAL APPRECIATION FUND (SUB-ACCOUNT 12) -- The Select Capital
Appreciation Fund of the Trust seeks long-term growth of capital in a manner
consistent with the preservation of capital. Realization of income is not a
significant investment consideration and any income realized on the Fund's
investments will be incidental to its primary objective. The Fund will invest
primarily in
19
<PAGE>
common stock of industries and companies which are experiencing favorable demand
for their products and services, and which operate in a favorable competitive
environment and regulatory climate. The Sub-Adviser for the Select Capital
Appreciation Fund is Janus Capital Corporation.
FIDELITY VIP HIGH INCOME PORTFOLIO (SUB-ACCOUNT 102) -- The High Income
Portfolio of Fidelity VIP seeks to obtain a high level of current income by
investing primarily in high-yielding, lower-rated fixed-income securities
(commonly referred to as "junk bonds"), while also considering growth of
capital. These securities are often considered to be speculative and involve
greater risk of default or price changes than securities assigned a high quality
rating. For more information about these lower-rated securities, see "Risks of
Lower-Rated Debt Securities" in the Fidelity VIP prospectus.
FIDELITY VIP EQUITY-INCOME PORTFOLIO (SUB-ACCOUNT 103) -- The Equity-Income
Portfolio of Fidelity VIP seeks reasonable income by investing primarily in
income-producing equity securities. In choosing these securities, the Portfolio
will also consider the potential for capital appreciation. The Portfolio's goal
is to achieve a yield which exceeds the composite yield on the securities
comprising the Standard & Poor's 500 Composite Stock Price Index. The Portfolio
may invest in high yielding, lower-rated fixed-income securities (commonly
referred to as "junk bonds") which are subject to greater risk than investments
in higher-rated securities. For a further discussion of lower-rated securities,
please see "Risks of Lower-Rated Debt Securities" in the Fidelity VIP
prospectus.
FIDELITY VIP GROWTH PORTFOLIO (SUB-ACCOUNT 104) -- The Growth Portfolio of
Fidelity VIP seeks to achieve capital appreciation. The Portfolio normally
purchases common stocks, although its investments are not restricted to any one
type of security. Capital appreciation may also be found in other types of
securities, including bonds and preferred stocks.
FIDELITY VIP OVERSEAS PORTFOLIO (SUB-ACCOUNT 105) -- The Overseas Portfolio of
Fidelity VIP seeks long-term growth of capital primarily through investments in
foreign securities and provides a means for aggressive investors to diversify
their own portfolios by participating in companies and economies outside of the
United States.
FIDELITY VIP II ASSET MANAGER PORTFOLIO (SUB-ACCOUNT 106) -- The Asset Manager
Portfolio of Fidelity VIP II seeks high total return with reduced risk over the
long-term by allocating its assets among stocks, bonds and short-term
fixed-income instruments.
T. ROWE PRICE INTERNATIONAL STOCK PORTFOLIO (SUB-ACCOUNT 150) -- The T. Rowe
Price International Stock Portfolio of seeks long-term growth of capital through
investments primarily in common stocks of established, non-U.S. companies.
INTERNATIONAL EQUITY SERIES (SUB-ACCOUNT 207) -- The International Equity Series
of DGPF seeks long-term growth without undue risk to principal by investing
primarily in equity securities of foreign issuers providing the potential for
capital appreciation and income.
CERTAIN PORTFOLIOS HAVE INVESTMENT OBJECTIVES AND/OR POLICIES SIMILAR TO THOSE
OF CERTAIN FUNDS OR SERIES. THEREFORE, TO CHOOSE THE SUB-ACCOUNTS WHICH WILL
BEST MEET YOUR NEEDS AND OBJECTIVES, CAREFULLY READ THE PROSPECTUSES OF THE
TRUST, FIDELITY VIP, FIDELITY VIP II, T. ROWE PRICE AND DGPF ALONG WITH THIS
PROSPECTUS.
In the event of a material change in the investment policy of a Sub-Account or
the Underlying Fund in which it invests, you will be notified of the change. No
material change in the investment policy of a Sub-Account will be made without
approval pursuant to the applicable state insurance laws. If you have Policy
Value in that Sub-Account, the Company will transfer it without charge on
written request by you to another Sub-Account or to the General Account. The
Company must receive your written request within sixty (60) days of the later of
(a) the effective date of such change in the investment policy or (b) the
receipt of the notice of your right to transfer. You may then change your
premium and deduction allocation percentages.
20
<PAGE>
INVESTMENT ADVISORY SERVICES TO THE TRUST -- The overall responsibility for the
supervision of the affairs of the Trust vests in the Trustees. The Trust has
entered into a Management Agreement with Allmerica Investment Management
Company, Inc. ("Allmerica Investment"), an indirect wholly-owned subsidiary of
the Company, to handle the day-to-day affairs of the Trust. Allmerica
Investment, subject to review by the Trustees, is responsible for the general
management of the Funds. Allmerica Investment also performs certain
administrative and management services for the Trust, furnishes to the Trust all
necessary office space, facilities, and equipment, and pays the compensation, if
any, of officers and Trustees who are affiliated with Allmerica Investment.
Other than the expenses specifically assumed by Allmerica Investment 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, 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 Allmerica Investment, expenses for proxies, prospectuses, and reports to
shareholders, and other expenses.
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.
The Sub-Advisers of each of the Funds are as follows:
<TABLE>
<S> <C>
Growth Fund Miller, Anderson & Sherrerd
Investment Grade Income Allmerica Asset Management, Inc.
Money Market Fund Allmerica Asset Management, Inc.
Equity Index Fund Allmerica Asset Management, Inc.
Government Bond Fund Allmerica Asset Management, Inc.
Select International Equity Fund Bank of Ireland Asset Management
Select Aggressive Growth Fund Nicholas-Applegate Capital Management
Select Capital Appreciation Fund Janus Capital Corporation
Select Growth Fund Putnam Investment Management, Inc.
Select Growth and Income Fund John A. Levin & Co., Inc.
Small Cap Value Fund David L. Babson & Co. Inc.
</TABLE>
Allmerica Asset Management, Inc. is an indirect wholly owned subsidiary of the
Company.
21
<PAGE>
For providing its services under the Management Agreement, Allmerica Investment
will receive a fee, computed daily at an annual rate based on the average daily
net asset value of each Fund as follows:
<TABLE>
<CAPTION>
FUND NET ASSET VALUE RATE
- -------------------------------- --------------------- -----------
<S> <C> <C>
Growth First $50 million 0.60%
$50 - 250 million 0.50%
Over $250 million 0.35%
Investment Grade Income First $50 million 0.50%
$50 - 250 million 0.35%
Over $250 million 0.25%
Money Market First $50 million 0.35%
$50 - 250 million 0.25%
Over $250 million 0.20%
Equity Index First $50 million 0.35%
$50 - 250 million 0.30%
Over $250 million 0.25%
Government Bond * 0.50%
Select International Equity * 1.00%
Select Aggressive Growth * 1.00%
Select Capital Appreciation * 1.00%
Select Growth * 0.85%
Select Growth and Income * 0.75%
Small Cap Value * 0.85%
</TABLE>
*For the Government Bond Fund, Select International Equity Fund, Select
Aggressive Growth Fund, Select Capital Appreciation Fund, Select Growth Fund,
Select Growth and Income Fund and Small Cap Value Fund, each rate applicable to
Allmerica Investment does not vary according to the level of assets in the
Fund. Allmerica Investment's fee computed for each Fund will be paid from the
assets of such Fund.
22
<PAGE>
Allmerica Investment is solely responsible for the payment of all fees for
investment management services to the Sub-Advisers, who will receive from
Allmerica Investment a fee, computed daily at an annual rate based on the
average daily net asset value of each Fund as follows:
<TABLE>
<CAPTION>
SUB-ADVISER FUND NET ASSET VALUE RATE
- ------------------------------------------------ ------------------------------- --------------------- -----------
<S> <C> <C> <C>
Miller, Anderson & Sherrerd Growth * *
Allmerica Asset Management, Inc. Investment Grade Income ** 0.20%
Allmerica Asset Management, Inc. Money Market ** 0.10%
Allmerica Asset Management, Inc. Equity Index ** 0.10%
Allmerica Asset Management, Inc. Government Bond ** 0.20%
Bank of Ireland Asset Management Limited Select International Equity First $50 million 0.45%
Next $50 million 0.40%
Over $100 million 0.30%
Nicholas-Applegate Capital Management Select Aggressive Growth ** 0.60%
Janus Capital Corporation Select Capital Appreciation First $100 million 0.60%
Over $100 million 0.55%
Putnam Investment Management, Inc. Select Growth First $50 million 0.50%
$50-150 million 0.45%
$150-250 million 0.35%
$250-350 million 0.30%
Over $350 million 0.25%
John A. Levin & Co., Inc. Select Growth and Income First $100 million 0.40%
Next $200 million 0.25%
Over $300 million 0.30%
David L. Babson & Co. Inc. Small Cap Value ** 0.50%
</TABLE>
*Allmerica Investment will pay a fee to Miller, Anderson & Sherrerd based on the
aggregate assets of the Growth Fund and certain other accounts of the Company
and its affiliates (collectively, the "Affiliated Accounts") which are managed
by Miller, Anderson & Sherrerd, under the following schedule:
<TABLE>
<CAPTION>
AGGREGATE AVERAGE 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, Select Aggressive Growth Fund and Small Cap Value Fund,
each rate applicable to the Sub-Advisers does not vary according to the level
of assets in the Fund.
The prospectus of the Trust contains additional information concerning the
Funds, including information concerning additional expenses paid by the Funds,
and should be read in conjunction with this prospectus.
23
<PAGE>
INVESTMENT ADVISORY SERVICES TO FIDELITY VIP AND FIDELITY VIP II -- For managing
investments and business affairs, each Portfolio pays a monthly fee to Fidelity
Management.
The prospectuses of Fidelity VIP and Fidelity VIP II contain additional
information concerning the Portfolios, including information concerning
additional expenses paid by the Portfolios, and should be read in conjunction
with this prospectus.
FIDELITY VIP AND FIDELITY II PORTFOLIOS -- The Fidelity VIP High Income
Portfolio pays a monthly fee to Fidelity Management at an annual fee rate made
up of the sum of two components:
1. A group fee rate based on the monthly average net assets of all the
mutual funds advised by Fidelity Management. On an annual basis this rate
cannot rise above 0.37%, and drops as total assets in all these funds
rise.
2. An individual fund fee rate of 0.45% of the Fidelity VIP High Income
Portfolio's average net assets throughout the month. One-twelfth of the
annual management fee rate is applied to net assets averaged over the
most recent month, resulting in a dollar amount which is the management
fee for that month.
The Fidelity VIP Equity-Income, Fidelity VIP Growth, Fidelity VIP II Asset
Manager and Fidelity VIP Overseas Portfolios' fee rates are each made of two
components:
1. A group fee rate based on the monthly average net assets of all of the
mutual funds advised by Fidelity Management. On an annual basis, this
rate cannot rise above 0.52%, and drops as total assets in all these
mutual funds rise.
2. An individual Portfolio fee rate of 0.20% for the Fidelity VIP
Equity-Income Portfolio, 0.30% for the Fidelity VIP Growth Portfolio,
0.40% for the Fidelity VIP II Asset Manager Portfolio and 0.45% for the
Fidelity VIP Overseas Portfolio.
One-twelfth of the sum of these two rates is applied to the respective
Portfolio's net assets averaged over the most recent month, giving a dollar
amount which is the fee for that month.
Thus, the Fidelity VIP High Income Portfolio may have a fee of as high as 0.82%
of its average net assets. The Fidelity VIP Equity-Income Portfolio may have a
fee of as high as 0.72% of its average net assets. The Fidelity VIP Growth
Portfolio may have a fee of as high as 0.82% of its average net assets. The
Fidelity VIP II Asset Manager Portfolio may have a fee as high as 0.92% of its
average net assets. The Fidelity VIP Overseas Portfolio may have a fee of as
high as 0.97% of its average net assets. The actual fee rate may be less
depending on the total assets in the funds advised by Fidelity Management.
INVESTMENT ADVISORY SERVICES TO T. ROWE PRICE -- The Investment Adviser for the
T. Rowe Price International Stock Portfolio is Rowe Price-Fleming International,
Inc. ("Price-Fleming"). Price-Fleming, founded in 1979 as a joint venture
between T. Rowe Price Associates, Inc. and Robert Fleming Holdings, Limited, is
one of America's largest international mutual fund asset managers with
approximately $20 billion under management in its offices in Baltimore, London,
Tokyo and Hong Kong. To cover investment management and operating expenses, the
International Stock Portfolio pays Price-Fleming a single, all-inclusive fee of
1.05% of its average daily net assets.
INVESTMENT ADVISORY SERVICES TO DGPF -- Each Series of DGPF pays an investment
adviser an annual fee for managing the portfolios and making the investment
decisions for the Series. The investment adviser for the International Equity
Series is Delaware International Advisers Ltd. ("Delaware International"). The
annual fee paid by the International Equity Series to Delaware International is
equal to 0.75% of the average daily net assets of the Series.
24
<PAGE>
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS
The Company reserves the right, subject to applicable law, to make additions to,
deletions from, or substitutions for the shares that are held in the
Sub-Accounts or that the Sub-Accounts may purchase. If the shares of any
Underlying Fund are no longer available for investment or if in the Company's
judgment further investment in any Underlying Fund should become inappropriate
in view of the purposes of the VEL II Account or the affected Sub-Account, the
Company may redeem the shares of that Underlying Fund and substitute shares of
another registered open-end management company. The Company will not substitute
any shares attributable to a Policy interest in a Sub-Account without notice to
the Policyowner and prior approval of the Commission and state insurance
authorities, to the extent required by the 1940 Act or other applicable law. The
VEL II Account may, to the extent permitted by law, purchase other securities
for other policies or permit a conversion between policies upon request by a
Policyowner.
The Company also reserves the right to establish additional Sub-Accounts of the
VEL II Account, each of which would invest in shares corresponding to a new
Underlying Fund or in shares of another investment company having a specified
investment objective. Subject to applicable law and any required Commission
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 Policyowners on a basis to be determined by the Company.
Shares of the Funds of the Trust are also issued to separate accounts of the
Company and its affiliates which issue variable annuity contracts ("mixed
funding"). Shares of the Portfolios of Fidelity VIP and Fidelity VIP II, the
Portfolio of T. Rowe Price and the Series of DGPF are also issued to other
unaffiliated insurance companies ("shared funding"). It is conceivable that in
the future such mixed funding or shared funding may be disadvantageous for
variable life Policyowners or variable annuity Policyowners. Although the
Company and the Underlying Investment Companies do not currently foresee any
such disadvantages to either variable life insurance Policyowners or variable
annuity Policyowners, the Company and the respective Trustees intend to monitor
events in order to identify any material conflicts between such Policyowners and
to determine what action, if any, should be taken in response thereto. If the
Trustees were to conclude that separate funds should be established for variable
life and variable annuity separate accounts, the Company will bear the attendant
expenses.
If any of these substitutions or changes are made, the Company may by
appropriate endorsement change the Policy to reflect the substitution or change
and will notify Policyowners of all such changes. If the Company deems it to be
in the best interest of Policyowners, and subject to any approvals that may be
required under applicable law, the VEL II Account or any Sub-Account(s) 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
To the extent required by law, the Company will vote Underlying Fund shares held
by each Sub-Account in accordance with instructions received from Policyowners
with Policy Value in such Sub-Account. 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.
Each person having a voting interest will be provided with proxy materials of
the respective Underlying Fund together with an appropriate form with which to
give voting instructions to the Company. Shares held in each Sub-Account for
which no timely instructions are received will be voted in
25
<PAGE>
proportion to the instructions received from all persons with an interest in
such Sub-Account furnishing instructions to the Company. The Company will also
vote shares held in the VEL II Account that it owns and which are not
attributable to Policies in the same proportion.
The number of votes which a Policyowner has the right to instruct will be
determined by the Company as of the record date established for the Underlying
Fund. This number is determined by dividing each Policyowner's Policy Value in
the Sub-Account, if any, by the net asset value of one share in the
corresponding Underlying Fund in which the assets of the Sub-Account are
invested.
The Company may, when required by state insurance regulatory authorities,
disregard voting instructions if the instructions require that the shares be
voted so as (a) to cause a change in the subclassification or investment
objective of one or more of the Underlying Funds, or (b) to approve or
disapprove an investment advisory contract for the Underlying Funds. In
addition, the Company may disregard voting instructions in favor of any change
in the investment policies or in any investment adviser or principal underwriter
initiated by Policyowners or the Trustees. The Company's disapproval of any such
change must be reasonable and, in the case of a change in investment policies or
investment adviser, based on a good faith determination that such change would
be contrary to state law or otherwise is inappropriate in light of the
objectives and purposes of the Underlying Funds. In the event the Company does
disregard voting instructions, a summary of and the reasons for that action will
be included in the next periodic report to Policyowners.
THE POLICY
APPLICATION FOR A POLICY -- Upon receipt at its Principal Office of a completed
application from a prospective Policyowner, the Company will follow certain
insurance underwriting procedures designed to determine whether the proposed
Insured is insurable. This process may involve such verification procedures as
medical examinations and may require that further information be provided by the
proposed Policyowner before a determination of insurability can be made. A
Policy cannot be issued until this underwriting procedure has been completed.
The Company reserves the right to reject an application which does not meet the
Company's underwriting guidelines, but in underwriting insurance, the Company
shall comply with all applicable federal and state prohibitions concerning
unfair discrimination.
If at the time of application a prospective Policyowner makes a payment equal to
at least one Minimum Monthly Factor for the Policy as applied for, pending
underwriting approval, the Company will provide fixed conditional insurance
pursuant to a Conditional Insurance Agreement in the amount of insurance applied
for, up to a maximum of $500,000. This coverage will generally continue for a
maximum of 90 days from the date of the application or the completion of a
medical exam, should one be required. In no event will any insurance proceeds be
paid under the Conditional Insurance Agreement if death is by suicide.
If the application is approved, the Policy will be issued as of the date the
terms of the Conditional Insurance Agreement were met. If no Conditional
Insurance Agreement is in effect because the prospective Policyowner does not
wish to make any payment until the Policy is issued or has paid an initial
premium that is not sufficient to place the Policy in force, upon delivery of
the Policy the Company will require payment of sufficient premium to place the
insurance in force.
Pending completion of insurance underwriting and Policy issuance procedures, the
initial premium will be held in the Company's General Account. If the
application is approved and the Policy is issued and accepted, the initial
premium held in the General Account will be credited with interest not later
than the date of receipt of the premium at the Company's Principal Office. IF A
POLICY IS NOT ISSUED, THE PREMIUMS WILL BE RETURNED TO YOU WITHOUT INTEREST.
If the Policy is issued to the Trustee of an employee benefit plan, the amounts
held in the Company's General Account will be allocated to the Sub-Accounts
according to the Policyowner's instructions, upon return of a Delivery Receipt
to the Principal Office. For all other Policyowners, if the initial net
26
<PAGE>
premiums are less than $10,000, the amounts held in the Company's General
Account will be allocated to the Sub-Accounts (according to your instructions)
not later than three days after underwriting approval of the Policy. If the
initial net premiums equal or exceed $10,000, or if the Policy provides for
planned premium payments during the first year equal to or exceeding $10,000
annually, $5,000 semi-annually, $2,500 quarterly or $1,000 monthly, the entire
Net Premium plus any interest earned will remain in the General Account until
return of a Delivery Receipt to the Principal Office. The entire amount held in
the General Account for allocation to the VEL Account will then be allocated to
the Sub-Accounts according to your instructions. Amounts remaining in the
General Account will continue to be credited interest from date of receipt of
the premium at the Principal Office.
FREE LOOK PERIOD -- The Policy provides for an initial Free Look Period. You may
cancel the Policy by mailing or delivering the Policy to the Principal Office or
an agent of the Company on or before the latest of (a) 45 days after the
application for the Policy is signed, (b) 10 days after you receive the Policy,
or (c) 10 days after the Company mails or personally delivers a notice of
withdrawal rights to you. When you return the Policy, the Company will mail
within 7 days a refund equal to the premiums paid. The refund of any premium
paid by check, however, may be delayed until the check has cleared your bank.
After an increase in Face Amount, the Company will mail or personally deliver a
notice of a "Free Look" with respect to the increase. You will have the right to
cancel the increase before the latest of (a) 45 days after the application for
the increase is signed, (b) 10 days after you receive the new specification
pages issued for the increase, or (c) 10 days after the Company mails or
delivers a notice of withdrawal rights to you. Upon cancelling the increase, you
will receive a credit to your Policy Value of charges which would not have been
deducted but for the increase. The amount to be credited will be refunded if you
so request. The Company will also waive any surrender charge calculated for the
increase.
CONVERSION PRIVILEGES -- Without Evidence of Insurability, you may convert this
Policy to a flexible premium adjustable life insurance policy with fixed and
guaranteed minimum benefits if your request is made: (a) within 24 months of the
Date of Issue, or (b) within 60 days after the later of the effective date of a
material change in the investment policy of a Sub-Account or the date notice is
mailed to your last known address. The new policy, including any riders then in
effect, will have the same Face Amount, issue ages, dates of issue, and risk
classifications as the original Policy.
Within 24 months after the effective date of each increase in Face Amount, you
can transfer, without charge, all or part of the Policy Value in the VEL II
Account to the General Account and simultaneously change your premium allocation
instructions to allocate all or part of future premium payments to the General
Account.
PREMIUM PAYMENTS -- Premium Payments are payable to the Company, and may be
mailed to the Principal Office or paid through an authorized agent of the
Company. All premium payments after the initial premium payment are credited to
the VEL II Account or General Account as of date of receipt at the Principal
Office.
You may establish a schedule of planned premiums which will be billed by the
Company at regular intervals. Failure to pay planned premiums, however, will not
itself cause the Policy to lapse. You may also make unscheduled premium payments
at any time prior to the Final Premium Payment Date or skip planned premium
payments, subject to the maximum and minimum premium limitations described
below. Therefore, unlike conventional insurance policies, a Policy does not
obligate you to pay premiums in accordance with a rigid and inflexible premium
schedule.
You may also elect to pay premiums by means of a monthly automatic payment
("MAP") procedure. Under a MAP procedure, amounts will be deducted each month,
generally on the Monthly Payment Date, from your checking account and applied as
a premium under a Policy. The minimum payment permitted under MAP is $50.
27
<PAGE>
Premiums are not limited as to frequency and number. However, no premium payment
may be less than $100 without the Company's consent. Moreover, premium payments
must be sufficient to provide a positive Surrender Value at the end of each
Policy month, or the Policy may lapse. See "POLICY TERMINATION AND
REINSTATEMENT." If, in the first 48 policy months following issue or an increase
in the Face Amount, you make premium payments, less partial withdrawals and
partial withdrawal charges, at least equal to the sum of the Minimum Monthly
Factors for the number of months the Policy, increase in Face Amount, or Policy
Change which causes a change in the Minimum Monthly Factor has been in force,
the Policy is guaranteed not to lapse during that period. EXCEPT FOR THE 48
POLICY MONTHS AFTER THE DATE OF ISSUE OR THE EFFECTIVE DATE OF AN INCREASE IN
FACE AMOUNT, MAKING MONTHLY PAYMENTS AT LEAST EQUAL TO THE MINIMUM MONTHLY
FACTORS DOES NOT GUARANTEE THAT THE POLICY WILL REMAIN IN FORCE.
In no event may the total of all premiums paid exceed the current maximum
premium limitations set forth in the Policy, which are required by Federal tax
laws. These maximum premium limitations will change whenever there is any change
in the Face Amount, the addition or deletion of a rider, or a change in the Sum
Insured Option. If a premium is paid which would result in total premiums
exceeding the current maximum premium limitations, the Company will only accept
that portion of the premiums which shall make total premiums equal the maximum.
Any part of the premiums in excess of that amount will be returned and no
further premiums will be accepted until allowed by the current maximum premium
limitation prescribed by Internal Revenue Service rules. However,
notwithstanding the current maximum premium limitations, the Company will accept
a premium which is needed in order to prevent a lapse of the Policy during a
policy year. See "POLICY TERMINATION AND REINSTATEMENT."
ALLOCATION OF NET PREMIUMS -- The Net Premium equals the premium paid less the
tax expense charge. In the application for a Policy, you indicate the initial
allocation of Net Premiums among the General Account and the Sub-Accounts of the
VEL II Account. You may allocate premiums to one or more Sub-Accounts, but may
not have Policy Value in more than seven (7) Sub-Accounts at any one time. The
minimum amount which may be allocated to a Sub-Account is 1% of Net Premium
paid. Allocation percentages must be in whole numbers (for example, 33 1/3% may
not be chosen) and must total 100%.
You may change the allocation of future Net Premiums at any time pursuant to
written or telephone request. If allocation changes by telephone are elected by
the Policyowner, a properly completed authorization form must be on file before
telephone requests will be honored. The policy of the Company and its agents and
affiliates is that they will not be responsible for losses resulting from acting
upon telephone requests reasonably believed to be genuine. The Company will
employ reasonable procedures to confirm that instructions communicated by
telephone are genuine; otherwise, the Company may be liable for any losses due
to unauthorized or fraudulent instructions. The procedures the Company follows
for transactions initiated by telephone include requirements that callers on
behalf of a Policyowner identify themselves by name and identify the Policyowner
by name, date of birth and social security number. All transfer instructions by
telephone are tape recorded. An allocation change will be effective as of the
date of receipt of the notice at the Principal Office. No charge is currently
imposed for changing premium allocation instructions. The Company reserves the
right to impose such a charge in the future, but guarantees that the charge will
not exceed $25.
The Policy Value in the Sub-Accounts will vary with their investment experience;
you bear this investment risk. The investment performance may affect the Death
Proceeds as well. Policyowners should periodically review their allocations of
premiums and Policy Value in light of market conditions and overall financial
planning requirements.
TRANSFER PRIVILEGE -- Subject to the Company's then current rules, you may at
any time transfer the Policy Value among the Sub-Accounts or between a
Sub-Account and the General Account. However, the Policy Value held in the
General Account to secure a Policy loan may not be transferred.
28
<PAGE>
All requests for transfers must be made to the Principal Office. The amount
transferred will be based on the Policy Value in the Account(s) next computed
after receipt of the transfer order. The Company will make transfers pursuant to
written or telephone request. As discussed under "THE POLICY -- Allocation of
Net Premiums," a properly completed authorization form must be on file at the
Principal Office before telephone instructions will be honored.
Transfers involving the General Account are currently permitted only if:
(a) There has been at least a ninety (90) day period since the last transfer
from the General Account; and
(b) The amount transferred from the General Account in each transfer does
not exceed the lesser of $100,000 or 25% of the Accumulated Value under
the Policy.
These rules are subject to change by the Company.
DOLLAR COST AVERAGING OPTION AND AUTOMATIC REBALANCING OPTION. You may have
automatic transfers of at least $100 each made on a periodic basis (a) from
Sub-Account 3 or Sub-Account 5 (which invest in the Money Market Fund and
Government Bond Fund of the Trust, respectively) to one or more of the other
Sub-Accounts ("Dollar Cost Averaging Option") or (b) to automatically reallocate
Policy Value among the Sub-Accounts ("Automatic Rebalancing Option"). Automatic
transfers may be made on a monthly, bimonthly, quarterly, semiannual or annual
schedule. Generally, all transfers will be processed on the 15th of each
scheduled month. However, if the 15th is not a business day or is the Monthly
Payment Date, the automatic transfer will be processed on the next business day.
The Dollar Cost Averaging Option and the Automatic Rebalancing Option may not be
in effect at the same time.
The transfer privilege is subject to the consent of the Company. The Company
reserves the right to impose limitations on transfers including, but not limited
to: (1) the minimum amount that may be transferred (which minimum amount will
never be greater than $500), (2) the minimum amount that may remain in a
Sub-Account following a transfer from that Sub-Account, (3) the minimum period
of time between transfers involving the General Account, and (4) the maximum
amount that may be transferred each time from the General Account (which maximum
amount will never be less than the lesser of $100,000 or 10% of Policy Value).
The first twelve transfers in a Policy year will be free of any charge.
Thereafter a $10 transfer charge will be deducted from the amount transferred
for each transfer in that Policy year. The Company may increase or decrease this
charge, but it is guaranteed never to exceed $25. The first automatic transfer
counts as one transfer towards the twelve free transfers allowed in each policy
year; each subsequent automatic transfer is without charge and does not reduce
the remaining number of transfers which may be made free of charge. Any
transfers made with respect to a conversion privilege, Policy loan or material
change in investment policy will not count towards the twelve free transfers.
DEATH PROCEEDS -- As long as the Policy remains in force (see "POLICY
TERMINATION AND REINSTATEMENT"), the Company will, upon due proof of the
Insured's death, pay the Death Proceeds of the Policy to the named Beneficiary.
The Company will normally pay the Death Proceeds within seven days of receiving
due proof of the Insured's death, but the Company may delay payments under
certain circumstances. See "OTHER POLICY PROVISIONS -- Postponement Of
Payments." The Death Proceeds may be received by the Beneficiary in cash or
under one or more of the payment options set forth in the Policy. See "APPENDIX
B -- PAYMENT OPTIONS."
Prior to the Final Premium Payment Date, the Death Proceeds are: (a) The Sum
Insured provided under Option 1 or Option 2, whichever is elected and in effect
on the date of death; plus (b) any additional insurance on the Insured's life
that is provided by rider; minus (c) any outstanding Debt, any partial
withdrawals and partial withdrawal charges, and any Monthly Deductions due and
unpaid through the Policy month in which the Insured dies. After the Final
Premium Payment Date, the Death Proceeds equal the surrender Value of the
Policy. The amount of Death Proceeds payable will be determined as of the date
of the Company's receipt of due proof of the Insured's death.
29
<PAGE>
SUM INSURED OPTIONS -- The Policy provides two Sum Insured Options: Option 1 and
Option 2, as described below. You designate the desired Sum Insured Option in
the application. You may change the option once per Policy year by written
request. There is no charge for a change in option.
Under Option 1, the Sum Insured is equal to the greater of the Face Amount of
insurance or the Guideline Minimum Sum Insured.
Under Option 2, the Sum Insured is equal to the greater of the Face Amount of
insurance plus the Policy Value or the Guideline Minimum Sum Insured.
GUIDELINE MINIMUM SUM INSURED -- The Guideline Minimum Sum Insured is equal to a
percentage of the Policy Value as set forth in the table below. The Guideline
Minimum Sum Insured is determined in accordance with Internal Revenue Code
regulations to ensure that the Policy qualifies as a life insurance contract and
that the insurance proceeds will be excluded from the gross income of the
Beneficiary.
GUIDELINE MINIMUM SUM INSURED TABLE
<TABLE>
<CAPTION>
AGE OF INSURED
ON DATE OF PERCENTAGE OF
DEATH POLICY VALUE
- -------------------------------------------------------------------------------- -------------
<S> <C>
40 and under.................................................................... 250%
45.............................................................................. 215%
50.............................................................................. 185%
55.............................................................................. 150%
60.............................................................................. 130%
65.............................................................................. 120%
70.............................................................................. 115%
75.............................................................................. 105%
80.............................................................................. 105%
85.............................................................................. 105%
90.............................................................................. 105%
95 and above.................................................................... 100%
</TABLE>
For the Ages not listed, the progression between the listed Ages is linear.
30
<PAGE>
Under both Option 1 and Option 2 the Sum Insured provides insurance protection.
Under Option 1, the Sum Insured remains level unless the applicable percentage
of Policy Value under Guideline Minimum Sum Insured exceeds the Face Amount, in
which case the Sum Insured will vary as the Policy Value varies. Under Option 2,
the Sum Insured varies as the Policy Value changes.
For any Face Amount, the amount of the Sum Insured and thus the Death Proceeds
will be greater under Option 2 than under Option 1, since the Policy Value is
added to the specified Face Amount and included in the Death Proceeds only under
Option 2. However, the cost of insurance included in the Monthly Deduction will
be greater, and thus the rate at which Policy Value will accumulate will be
slower, under Option 2 than under Option 1 (assuming the same specified Face
Amount and the same actual premiums paid). See "CHARGES AND DEDUCTIONS --
Monthly Deduction From Policy Value." If you desire to have premium payments and
investment performance reflected in the amount of the Sum Insured, you should
choose Option 2. If you desire premium payments and investment performance
reflected to the maximum extent in the Policy Value, you should select Option 1.
ILLUSTRATION OF OPTION 1 -- For purposes of this illustration, assume that the
Insured is under the Age of 40, and that there is no outstanding Debt.
Under Option 1, a Policy with a $50,000 Face Amount will generally have a Sum
Insured equal to $50,000. However, because the Sum Insured must be equal to or
greater than 250% of Policy Value, if at any time the Policy Value exceeds
$20,000, the Sum Insured will exceed the $50,000 Face Amount. In this example,
each additional dollar of Policy Value above $20,000 will increase the Sum
Insured by $2.50. For example, a Policy with a Policy Value of $35,000 will have
a Guideline Minimum Sum Insured of $87,500 ($35,000 X 2.50); Policy Value of
$40,000 will produce a Guideline Minimum Sum Insured of $100,000 ($40,000 X
2.50); and Policy Value of $50,000 will produce a Guideline Minimum Sum Insured
of $125,000 ($50,000 X 2.50).
Similarly, so long as Policy Value exceeds $20,000, each dollar taken out of
Policy Value will reduce the Sum Insured by $2.50. If, for example, the Policy
Value is reduced from $25,000 to $20,000 because of partial withdrawals, charges
or negative investment performance, the Sum Insured will be reduced from $62,500
to $50,000. If at any time, however, the Policy Value multiplied by the
applicable percentage is less than the Face Amount, the Sum Insured will equal
the Face Amount of the Policy.
The applicable percentage becomes lower as the Insured's Age increases. If the
Insured's Age in the above example were, for example, 50 (rather than between 0
and 40), the applicable percentage would be 185%. The Sum Insured would not
exceed the $50,000 Face Amount unless the Policy Value exceeded $27,027 (rather
than $20,000), and each dollar then added to or taken from Policy Value would
change the Sum Insured by $1.85.
ILLUSTRATION OF OPTION 2 -- For purposes of this illustration, assume that the
Insured is under the Age of 40 and that there is no outstanding Debt.
Under Option 2, a Policy with a Face Amount of $50,000 will generally produce a
Sum Insured of $50,000 plus Policy Value. For example, a Policy with Policy
Value of $5,000 will produce a Sum Insured of $55,000 ($50,000 + $5,000); Policy
Value of $10,000 will produce a Sum Insured of $60,000 ($50,000 + $10,000);
Policy Value of $25,000 will produce a Sum Insured of $75,000 ($50,000 +
$25,000). However, the Sum Insured must be at least 250% of the Policy Value.
Therefore, if the Policy Value is greater than $33,333, 250% of that amount will
be the Sum Insured, which will be greater than the Face Amount plus Policy
Value. In this example, each additional dollar of Policy Value above $33,333
will increase the Sum Insured by $2.50. For example, if the Policy Value is
$35,000, the Guideline Minimum Sum Insured will be $87,500 ($35,000 X 2.50);
Policy Value of $40,000 will produce a Guideline Minimum Sum Insured of $100,000
($40,000 X 2.50); and Policy Value of $50,000 will produce a Guideline Minimum
Sum Insured of $125,000 ($50,000 X 2.50).
Similarly, if Policy Value exceeds $33,333, each dollar taken out of Policy
Value will reduce the Sum Insured by $2.50. If, for example, the Policy Value is
reduced from $45,000 to $40,000 because of partial withdrawals, charges or
negative investment performance, the Sum Insured will be reduced
31
<PAGE>
from $112,500 to $100,000. If at any time, however, Policy Value multiplied by
the applicable percentage is less than the Face Amount plus Policy Value, then
the Sum Insured will be the current Face Amount plus Policy Value.
The applicable percentage becomes lower as the Insured's Age increases. If the
Insured's Age in the above example were 50, the Sum Insured must be at least
1.85 times the Policy Value. The amount of the Sum Insured would be the sum of
the Policy Value plus $50,000 unless the Policy Value exceeded $58,824 (rather
than $33,000). Each dollar added to or subtracted from the Policy would change
the Sum Insured by $1.85.
The Sum Insured under Option 2 will always be the greater of the Face Amount
plus Policy Value or the Policy Value multiplied by the applicable percentage.
CHANGE IN SUM INSURED OPTION -- Generally, the Sum Insured Option in effect may
be changed once each Policy year by sending a written request for change to the
Principal Office. Changing Sum Insured Options will not require Evidence of
Insurability. The effective date of any such change will be the Monthly Payment
Date on or following the date of receipt of the request. No charges will be
imposed on changes in Sum Insured Options.
If the Sum Insured Option is changed from Option 2 to Option 1, the Face Amount
will be increased to equal the Sum Insured which would have been payable under
Option 2 on the effective date of the change (i.e. the Face Amount immediately
prior to the change plus the Policy Value on the date of the change). The amount
of the Sum Insured will not be altered at the time of the change. However, the
change in option will affect the determination of the Sum Insured from that
point on, since the Policy Value will no longer be added to the Face Amount in
determining the Sum Insured; the Sum Insured will equal the new Face Amount (or,
if higher, the Guideline Minimum Sum Insured). The cost of insurance may be
higher or lower than it otherwise would have been since any increases or
decreases in Policy Value will, respectively, reduce or increase the Insurance
Amount at Risk under Option 1. Assuming a positive net investment return with
respect to any amounts in the VEL II Account, changing the Sum Insured Option
from Option 2 to Option 1 will reduce the Insurance Amount at Risk and therefore
the cost of insurance charge for all subsequent Monthly Deductions, compared to
what such charge would have been if no such change were made.
If the Sum Insured Option is changed from Option 1 to Option 2, the Face Amount
will be decreased to equal the Sum Insured less the Policy Value on the
effective date of the change. This change may not be made if it would result in
a Face Amount less than $40,000. A change from Option 1 to Option 2 will not
alter the amount of the Sum Insured at the time of the change, but will affect
the determination of the Sum Insured from that point on. Because the Policy
Value will be added to the new specified Face Amount, the Sum Insured will vary
with the Policy Value. Thus, under Option 2, the Insurance Amount at Risk will
always equal the Face Amount unless the Guideline Minimum Sum Insured is in
effect. The cost of insurance may also be higher or lower than it otherwise
would have been without the change in Sum Insured Option. See "CHARGES AND
DEDUCTIONS -- Monthly Deduction From Policy Value."
A change in Sum Insured Option may result in total premiums paid exceeding the
then current maximum premium limitation determined by Internal Revenue Service
Rules. In such event, the Company will pay the excess to the Policyowner. See
"THE POLICY -- Premium Payments."
CHANGE IN FACE AMOUNT -- Subject to certain limitations, you may increase or
decrease the specified Face Amount of a Policy at any time by submitting a
written request to the Company. Any increase or decrease in the specified Face
Amount requested by you will become effective on the Monthly Payment Date on or
next following the date of receipt of the request at the Principal Office, or,
if Evidence of Insurability is required, the date of approval of the request.
INCREASES -- Along with the written request for an increase, you must submit
satisfactory Evidence of Insurability. The consent of the Insured is also
required whenever the Face Amount is increased. A request for an increase in
Face Amount may not be less than $10,000. You may not increase the Face
32
<PAGE>
Amount after the Insured reaches Age 80. An increase must be accompanied by an
additional premium if the Surrender Value is less than $50 plus an amount equal
to the sum of two Minimum Monthly Factors. On the effective date of each
increase in Face Amount, a transaction charge of $50 will be deducted from
Policy Value for administrative costs. The effective date of the increase will
be the first Monthly Payment Date on or following the date all of the conditions
for the increase are met.
An increase in the Face Amount will generally affect the Insurance Amount at
Risk and may affect the portion of the Insurance Amount at Risk included in
various Premium Classes (if more than one Premium Class applies), both of which
may affect the monthly cost of insurance charges. A surrender charge will also
be calculated for the increase. See "CHARGES AND DEDUCTIONS -- Monthly Deduction
From Policy Value -- Surrender Charge."
After increasing the Face Amount, you will have the right (1) during a Free Look
Period, to have the increase cancelled and the charges which would not have been
deducted but for the increase will be credited to the Policy, and (2) during the
first 24 months following the increase, to transfer any or all Policy Value to
the General Account free of charge. See "THE POLICY -- Free Look Period --
Conversion Privileges." A refund of charges which would not have been deducted
but for the increase will be made at your request.
DECREASES -- The minimum amount for a decrease in Face Amount is $10,000. The
Face Amount in force after any decrease may not be less than $50,000. If,
following a decrease in Face Amount, the Policy would not comply with the
maximum premium limitation applicable under the Internal Revenue Service Rules,
the decrease may be limited or Policy Value may be returned to the Policyowner
(at your election) to the extent necessary to meet the requirements. A return of
Policy Value may result in tax liability to you.
A decrease in the Face Amount will affect the total Insurance Amount at Risk and
the portion of the Insurance Amount at Risk covered by various Premium Classes,
both of which may affect a Policyowner's monthly cost of insurance charges. See
"CHARGES AND DEDUCTIONS -- Monthly Deduction From Policy Value." For purposes of
determining the cost of insurance charge, any decrease in the Face Amount will
reduce the Face Amount in the following order: (1) the Face Amount provided by
the most recent increase; (2) the next most recent increases successively; and
(3) the initial Face Amount. This order will also be used to determine whether a
surrender charge will be deducted and in what amount. If you request a decrease
in the Face Amount, the amount of any surrender charge deducted will reduce the
current Policy Value. You may specify one Sub-Account from which the surrender
charge will be deducted. If no specification is provided, the Company will make
a Pro Rata Allocation. The current surrender charge will be reduced by the
amount deducted. See "CHARGES AND DEDUCTIONS -- Surrender Charge."
POLICY VALUE AND SURRENDER VALUE -- The Policy Value is the total amount
available for investment and is equal to the sum of the accumulation in the
General Account and the value of the Accumulation Units in the Sub-Accounts. The
Policy Value is used in determining the Surrender Value (the Policy Value less
any Debt and applicable surrender charges). See "THE POLICY -- Surrender." There
is no guaranteed minimum Policy Value. Because Policy Value on any date depends
upon a number of variables, it cannot be predetermined.
Policy Value and Surrender Value will reflect frequency and amount of Net
Premiums paid, interest credited to accumulations in the General Account, the
investment performance of the chosen Sub-Accounts, any partial withdrawals, any
loans, any loan repayments, any loan interest paid or credited, and any charges
assessed in connection with the Policy.
CALCULATION OF POLICY VALUE -- The Policy Value is determined first on the Date
of Issue and thereafter on each Valuation Date. On the Date of Issue, the Policy
Value will be the Net Premiums received, plus any interest earned during the
period when premiums are held in the General Account (before being transferred
to the VEL II Account; see THE POLICY -- Application For A Policy") less any
Monthly Deductions due. On each Valuation Date after the Date of Issue the
Policy Value will be:
33
<PAGE>
(a) the aggregate of the values in each of the Sub-Accounts on the Valuation
Date, determined for each Sub-Account by multiplying the value of an
Accumulation Unit in that Sub-Account on that date by the number of such
Accumulations Units allocated to the Policy; plus
(b) the value in the General Account (including any amounts transferred to the
General Account with respect to a loan).
Thus, the Policy Value is determined by multiplying the number of Accumulation
Units in each Sub-Account by the value of the applicable Accumulation Units on
the particular Valuation Date, adding the products, and adding the amount of the
accumulations in the General Account, if any.
THE ACCUMULATION UNIT -- Each Net Premium is allocated to the Sub-Account(s)
selected by you. Allocations to the Sub-Accounts are credited to the Policy in
the form of Accumulation Units. Accumulation Units are credited separately for
each Sub-Account.
The number of Accumulation Units of each Sub-Account credited to the Policy is
equal to the portion of the Net Premium allocated to the Sub-Account, divided by
the dollar value of the applicable Accumulation Unit as of the Valuation Date
the payment is received at the Company's Principal Office. The number of
Accumulation Units will remain fixed unless changed by a subsequent split of
Accumulation Unit value, transfer, partial withdrawal or surrender. In addition,
if the Company is deducting the Monthly Deduction or other charges from a
Sub-Account, each such deduction will result in cancellation of a number of
Accumulation Units equal in value to the amount deducted.
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. That experience, in turn, will reflect the investment performance,
expenses and charges of the respective Underlying Fund. The value of an
Accumulation Unit was set at $1.00 on the first Valuation Date for each
Sub-Account. The dollar value of an Accumulation Unit on 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.
NET INVESTMENT FACTOR -- The net investment factor measures the investment
performance of a Sub-Account of the VEL II Account during the Valuation Period
just ended. The net investment factor for each Sub-Account is equal to 1.0000
plus the number arrived at by dividing (a) by (b) and subtracting (c) and (d)
from the result, where:
(a) is the investment income of that Sub-Account for the Valuation Period, plus
capital gains, realized or unrealized, credited during the Valuation
Period; minus capital losses, realized or unrealized, charged during the
Valuation Period; adjusted for provisions made for taxes, if any;
(b) is the value of that Sub-Account's assets at the beginning of the Valuation
Period;
(c) is a charge for each day in the Valuation Period equal on an annual basis
to 0.65% of the daily net asset value of that Sub-Account for mortality and
expense risks. This charge may be increased or decreased by the Company,
but may not exceed 1.275%; and
(d) is the VEL II Account administrative charge for each day in the Valuation
Period equal on an annual basis to 0.15% of the daily net asset value of
that Sub-Account. This charge may be increased or decreased by the Company,
but may not exceed 0.25%. The charge is applicable only during the first
ten Policy years.
The net investment factor may be greater or less than one. Therefore, the value
of an Accumulation Unit may increase or decrease. You bear the investment risk.
Allocations to the General Account are not converted into Accumulation Units,
but are credited interest at a rate periodically set by the Company. See "MORE
INFORMATION ABOUT THE GENERAL ACCOUNT."
34
<PAGE>
PAYMENT OPTIONS -- During the Insured's lifetime, you may arrange for the Death
Proceeds to be paid in a single sum or under one or more of the available
payment options. The payment options currently available are described in
Appendix B, "PAYMENT OPTIONS." These choices are also available at the Final
Premium Payment Date and if the Policy is surrendered. The Company may make more
payment options available in the future. If no election is made, the Company
will pay the Death Proceeds in a single sum. When the Death Proceeds are payable
in a single sum, the Beneficiary may, within one year of the Insured's death,
select one or more of the payment options, if no payments have yet been made.
OPTIONAL INSURANCE BENEFITS -- Subject to certain requirements, one or more of
the optional insurance benefits described in "APPENDIX A -- OPTIONAL BENEFITS"
may be added to a Policy by rider. The cost of any optional insurance benefits
will be deducted as part of the Monthly Deduction. See "CHARGES AND DEDUCTIONS
- -- Monthly Deduction From Policy Value."
SURRENDER -- You may at any time surrender the Policy and receive its Surrender
Value. The Surrender Value is the Policy Value less any Debt and applicable
surrender charges. The Surrender Value will be calculated as of the Valuation
Date on which a written request for surrender and the Policy are received at the
Principal Office. A surrender charge will be deducted when a Policy is
surrendered if less than 15 full Policy years have elapsed from the Date of
Issue of the Policy or from the effective date of any increase in Face Amount.
See "CHARGES AND DEDUCTIONS -- Surrender Charge."
The proceeds on surrender may be paid in a single lump sum or under one of the
payment options described in "APPENDIX B -- PAYMENT OPTIONS." The Company will
normally pay the Surrender Value within seven days following the Company's
receipt of the surrender request, but the Company may delay payment under the
circumstances described in "OTHER POLICY PROVISIONS -- Postponement Of
Payments."
For important tax consequences which may result from surrender see "FEDERAL TAX
CONSIDERATIONS."
PARTIAL WITHDRAWAL -- Any time after the first Policy year, you may withdraw a
portion of the Surrender Value of your Policy, subject to the limits stated
below, upon written request filed at the Principal Office. The written request
must indicate the dollar amount you wish to receive and the Accounts from which
such amount is to be withdrawn. You may allocate the amount withdrawn among the
Sub-Accounts and the General Account. If you do not provide allocation
instructions the Company will make a Pro Rata Allocation. Each partial
withdrawal must be in a minimum amount of $500. Under Option 1, the Face Amount
is reduced by the amount of the partial withdrawal, and a partial withdrawal
will not be allowed if it would reduce the Face Amount below $40,000.
A partial withdrawal from a Sub-Account will result in the cancellation of the
number of Accumulation Units equivalent in value to the amount withdrawn. The
amount withdrawn equals the amount requested by you plus the transaction charge
and any applicable partial withdrawal charge as described under "CHARGES AND
DEDUCTIONS -- Charges On Partial Withdrawal." The Company will normally pay the
amount of the partial withdrawal within seven days following the Company's
receipt of the partial withdrawal request, but the Company may delay payment
under certain circumstances described in "OTHER POLICY PROVISIONS --
Postponement Of Payments."
For important tax consequences which may result from partial withdrawals, see
"FEDERAL TAX CONSIDERATIONS."
35
<PAGE>
CHARGES AND DEDUCTIONS
Charges will be deducted in connection with the Policy to compensate the Company
for providing the insurance benefits set forth in the Policy and any additional
benefits added by rider, administering the Policy, incurring distribution
expenses, and assuming certain risks in connection with the Policies. Each of
the charges identified as an administrative charge is intended to reimburse the
Company for actual administrative costs incurred, and is not intended to result
in a profit to the Company.
TAX EXPENSE CHARGE -- Currently, a deduction of 2.25% of premiums for state and
local premium taxes and federal taxes imposed for deferred acquisition costs
("DAC taxes") is made from each premium payment. The premium payment less the
tax expense charge equals the Net Premium. The total charge is a combined state
and local premium tax deduction of 1.25% of premiums and a DAC tax deduction of
1% of premiums. While the premium tax of 1.25% is deducted from each premium
payment, some jurisdictions may not impose premium taxes. Premium taxes vary
from state to state, ranging from zero to 4.0%, and the 1.25% rate attributable
to premiums for state and local premium taxes approximates the average expenses
to the Company associated with the premium taxes. The 1.25% charge may be higher
or lower than the actual premium tax imposed by the applicable jurisdiction.
However, the Company does not expect to make a profit from this charge.
The 1% rate attributable to premiums for DAC taxes approximates the Company's
expenses in paying federal taxes for deferred acquisition costs associated with
the changes in the Company's expenses for premium taxes and DAC taxes. The DAC
tax deduction is a factor the Company must use when calculating the maximum
sales load it can charge under SEC rules.
MONTHLY DEDUCTION FROM POLICY VALUE -- Prior to the Final Premium Payment Date,
a Monthly Deduction from Policy Value will be made to cover a charge for the
cost of insurance, a charge for any optional insurance benefits added by rider
and a monthly administrative charge. The cost of insurance charge and the
monthly administrative charges are discussed below. The Monthly Deduction on or
following the effective date of a requested increase in the Face Amount will
also include a $50 administrative charge for the increase. See "THE POLICY --
Change In Face Amount."
Prior to the Final Premium Payment Date, the Monthly Deduction will be deducted
as of each Monthly Payment Date commencing with the Date of Issue of the Policy.
It will be allocated to one Sub-Account according to your instructions, or, if
no allocation is specified, the Company will make a Pro Rata Allocation. If the
Sub-Account you specify does not have sufficient funds to cover the Monthly
Deduction, the Company will deduct the charge for that month as if no
specification were made. However, if on subsequent Monthly Payment Dates there
is sufficient Policy Value in the Sub-Account you specified, the Monthly
Deduction will be deducted from that Sub-Account. No Monthly Deductions will be
made on or after the Final Premium Payment Date.
COST OF INSURANCE -- This charge is designed to compensate the Company for the
anticipated cost of providing Death Proceeds to Beneficiaries of those Insureds
who die prior to the Final Premium Payment Date. The cost of insurance is
determined on a monthly basis, and is determined separately for the initial Face
Amount and for each subsequent increase in Face Amount. Because the cost of
insurance depends upon a number of variables, it can vary from month to month.
CALCULATION OF THE CHARGE -- If you select Sum Insured Option 2, the monthly
cost of insurance charge for the initial Face Amount will equal the applicable
cost of insurance rate multiplied by the initial Face Amount. If you select Sum
Insured Option 1, however, the applicable cost of insurance rate will be
multiplied by the initial Face Amount less the Policy Value (minus charges for
rider benefits) at the beginning of the policy month. Thus, the cost of
insurance charge may be greater for owners who have selected Sum Insured Option
2 than for those who have selected Sum Insured Option 1, assuming the same Face
Amount in each case and assuming that the Guideline Minimum Sum Insured is not
in effect. In other words, since the Sum Insured under Option 1 remains constant
while the Sum Insured under Option 2 varies with the Policy Value, any Policy
Value increases will reduce the insurance charge under Option 1 but not under
Option 2.
36
<PAGE>
If you select Sum Insured Option 2, the monthly insurance charge for each
increase in Face Amount (other than an increase caused by a change in Sum
Insured Option) will be equal to the cost of insurance rate applicable to that
increase multiplied by the increase in Face Amount. If you select Sum Insured
Option 1, the applicable cost of insurance rate will be multiplied by the
increase in the Face Amount reduced by any Policy Value (minus rider charges) in
excess of the initial Face Amount at the beginning of the policy month.
If the Guideline Minimum Sum Insured is in effect under either Option, a monthly
cost of insurance charge will also be calculated for that portion of the Sum
Insured which exceeds the current Face Amount. This charge will be calculated by
multiplying the cost of insurance rate applicable to the initial Face Amount
times the Guideline Minimum Sum Insured (Policy Value times the applicable
percentage) less the greater of the Face Amount or the Policy Value if you
selected Sum Insured Option 1, or less the Face Amount plus the Policy Value if
you selected Sum Insured Option 2. When the Guideline Minimum Sum Insured is in
effect, the cost of insurance charge for the initial Face Amount and for any
increases will be calculated as set forth in the preceding two paragraphs.
The monthly cost of insurance charge will also be adjusted for any decreases in
Face Amount. See "THE POLICY -- Change In Face Amount: Decreases."
COST OF INSURANCE RATES -- Cost of insurance rates are based on male and female
rate tables, Age and Premium Class of the Insured at the Date of Issue, the
effective date of an increase or date of rider, as applicable, the amount of
premiums paid less debt, any partial withdrawals and withdrawal charges, and
risk classification. The cost of insurance rates are determined at the beginning
of each Policy year for the initial Face Amount. The cost of insurance rates for
an increase in Face Amount or rider are determined annually on the anniversary
of the effective date of each increase or rider. The cost of insurance rates
generally increase as the Insured's Age increases. The actual monthly cost of
insurance rates will be based on the Company's expectations as to future
mortality experience. They will not, however, be greater than the guaranteed
cost of insurance rates set forth in the Policy. These guaranteed rates are
based on the 1980 Commissioners Standard Ordinary Mortality Tables (Mortality
Table B, Smoker or Non-Smoker, Male or Female) and the Insured's sex and Age.
The Tables used for this purpose set forth different mortality estimates for
males and females and for smokers and non-smokers. Any change in the cost of
insurance rates will apply to all persons of the same insuring Age, sex and
Premium Class whose Policies have been in force for the same length of time.
The premium class of an Insured will affect the cost of insurance rates. The
Company currently places Insureds into preferred premium classes, standard
premium classes and substandard premium classes. In an otherwise identical
Contract, an Insured in the preferred premium class will have a lower cost of
insurance than an Insured in a standard premium class who, in turn, will have a
lower cost of insurance than an Insured in a substandard premium class with a
higher mortality risk. The premium classes are also divided into two categories:
smokers and nonsmokers. Nonsmoking Insureds will incur lower cost of insurance
rates than Insureds who are classified as smokers but who are otherwise in the
same premium class. Any Insured with an Age at issuance under 18 will be
classified initially as regular or substandard. The Insured then will be
classified as a smoker at Age 18 unless the Insured provides satisfactory
evidence that the Insured is a nonsmoker. The Company will provide notice to you
of the opportunity for the Insured to be classified as a nonsmoker when the
Insured reaches Age 18.
The cost of insurance rate is determined separately for the initial Face Amount
and for the amount of any increase in Face Amount. For each increase in Face
Amount you request, at a time when the Insured is in a less favorable Premium
Class than previously, a correspondingly higher cost of insurance rate will
apply only to that portion of the Insurance Amount at Risk for the increase. For
the initial Face Amount and any prior increases, the Company will use the
Premium Class previously applicable. On the other hand, if the Insured's Premium
Class improves on an increase, the lower cost of insurance rate generally will
apply to the entire Insurance Amount at Risk.
37
<PAGE>
MONTHLY ADMINISTRATIVE CHARGES -- Prior to the Final Premium Payment Date, a
monthly administrative charge of $5 per month will be deducted from Policy
Value. This charge will be used to compensate the Company for expenses incurred
in the administration of the Policy and will compensate the Company for first
year underwriting and other start-up expenses incurred in connection with the
Policy. These expenses include the cost of processing applications, conducting
medical examinations, determining insurability and the Insured's Premium Class,
and establishing Policy records. The Company does not expect to derive a profit
from these charges.
CHARGES AGAINST ASSETS OF THE VEL II ACCOUNT -- The Company assesses each
Sub-Account with a charge for mortality and expense risks assumed by the Company
and a charge for administrative expenses of the VEL II Account.
MORTALITY AND EXPENSE RISK CHARGE -- The Company currently makes a charge on an
annual basis of 0.65% of the daily net asset value in each Sub-Account. This
charge is for the mortality risk and expense risk which the Company assumes in
relation to the variable portion of the Policies. The total charges may be
increased or decreased by the Board of Directors of the Company once each year,
subject to compliance with applicable state and federal requirements, but it may
not exceed 1.275% on an annual basis.
Any mortality and expense risk charge above 0.90% is currently considered above
the range of industry practice. To increase the charge above the range of
industry practice, the Company must file a request with the Securities and
Exchange Commission ("SEC") for an exemption from certain SEC rules, in which it
would be necessary to demonstrate that the proposed charge is reasonable in
relation to the risks assumed under the Policy. Even with such a demonstration,
there is no assurance that the SEC would issue an exemption order.
The mortality risk assumed by the Company is that Insureds may live for a
shorter time than anticipated, and that the Company will therefore pay an
aggregate amount of Death Proceeds greater than anticipated. The expense risk
assumed is that the expenses incurred in issuing and administering the Policies
will exceed the amounts realized from the administrative charges provided in the
Policies. 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 costs are less than the amounts provided, the difference will be a
profit to the Company. To the extent this charge results in a current 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.
VEL II ACCOUNT ADMINISTRATIVE CHARGE -- During the first ten Policy years, the
Company assesses a charge on an annual basis of 0.15% of the daily net asset
value in each Sub-Account. The total charges may be increased or decreased by
the Company, subject to compliance with applicable state and federal
requirements, but it may not exceed 0.25% on an annual basis. The charge is
assessed to help defray administrative expenses actually incurred in the
administration of the VEL II Account and the Sub-Accounts and is not expected to
be a source of profit. The administrative functions and expenses assumed by the
Company in connection with the VEL II Account and the Sub-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, expenses of preparing and typesetting
prospectuses and the cost of printing prospectuses not allocable to sales
expense, filing and other fees. No VEL II Account administrative charge is
imposed after the tenth Policy year.
OTHER CHARGES AGAINST THE ASSETS OF THE VEL II ACCOUNT -- Because the
Sub-Accounts purchase shares of the Underlying Investment Companies, the value
of the Accumulation Units of the Sub-Accounts will reflect the investment
advisory fee and other expenses incurred by the Underlying Investment
38
<PAGE>
Companies. The prospectuses and statements of additional information of the
Trust, Fidelity VIP, Fidelity VIP II, T. Rowe Price and DGPF contain additional
information concerning such fees and expenses.
No charges are currently made against the Sub-Accounts for federal or state
income taxes. Should the Company determine that taxes will be imposed, the
Company may make deductions from the Sub-Account to pay such taxes. See "FEDERAL
TAX CONSIDERATIONS." The imposition of such taxes would result in a reduction of
the Policy Value in the Sub-Accounts.
SURRENDER CHARGE -- The Policy provides for a contingent surrender charge. A
separate surrender charge, described in more detail below, is calculated upon
issuance of the Policy and for each increase in Face Amount. The surrender
charge is comprised of a contingent deferred administrative charge and a
contingent deferred sales charge. The contingent deferred administrative charge
compensates the Company for expenses incurred in administering the Policy. The
contingent deferred sales charge compensates the Company for expenses relating
to the distribution of the Policy, including Agent's commissions, advertising
and the printing of the prospectus and sales literature.
A surrender charge may be deducted if you request a full surrender of the Policy
or a decrease in Face Amount. The duration of the surrender charge is 15 years
from Date of Issue or from the effective date of any increase in the Face Amount
for issue Ages 0 through 50, grading down to 10 years for issue Ages 55 and
above. The maximum surrender charge calculated upon issuance of the Policy is
equal to the sum of (a) plus (b), where (a) is equal to $8.50 per thousand
dollars of increase, and (b) is a deferred sales charge of 49% of premiums
associated with the increase, up to a maximum number of Guideline Annual
Premiums (for the increase) subject to the deferred sales charge that varies by
Age (at the time of increase) from 1.660714 (for Ages 0 through 55) to 0.948980
(for Age 80). In accordance with limitations under state insurance regulations,
the amount of the surrender charge will not exceed a specified amount per $1,000
of increase, as indicated in "APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER
CHARGES." The maximum surrender charge continues in a level amount for 40 Policy
months and reduces by 0.5% or more per month (depending on issue Age)
thereafter, as described in "APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER
CHARGES."
This reduction in the maximum surrender charge will reduce the deferred sales
charge and the deferred administrative charge proportionately.
If you surrender the Policy during the first two Policy years following the Date
of Issue before making premium payments associated with the initial Face Amount
which are at least equal to one Guideline Annual Premium, the deferred
administrative charge will be $8.50 per thousand dollars of initial Face Amount,
as described above, but the deferred sales charge will not exceed 29% of
premiums received, up to one Guideline Annual Premium, plus 9% of premiums
received in excess of one Guideline Annual Premium, but less than the maximum
number of Guideline Annual Premiums subject to the deferred sales charge. See
"APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES."
A separate surrender charge will apply to and is calculated for each increase in
Face Amount. The surrender charge for the increase is in addition to that for
the initial Face Amount. The maximum surrender charge for the increase is equal
to the sum of (a) plus (b), where (a) is equal to $8.50 per thousand dollars of
increase, and (b) is a deferred sales charge of 49% of premiums associated with
the increase, up to a maximum number of Guideline Annual Premiums (for the
increase) subject to the deferred sales charge that varies by Age (at the time
of increase) from 1.660714 (for Ages 0 through 55) to 0.948980 (for Age 80). In
accordance with limitations under state insurance regulations, the amount of the
surrender charge will not exceed a specified amount per $1,000 of increase, as
indicated in "APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES." As is
true for the initial Face Amount, (a) is a deferred administrative charge and
(b) is a deferred sales charge. The maximum surrender charge for the increase
continues in a level amount for 40 Policy months and reduces by 0.5% or more per
month (depending on Age) thereafter, as provided in "APPENDIX D --
39
<PAGE>
CALCULATION OF MAXIMUM SURRENDER CHARGES." During the first two Policy years
following an increase in Face Amount before making premium payments associated
with the increase in Face Amount which are at least equal to one Guideline
Annual Premium, the deferred administrative charge will be $8.50 per thousand
dollars of Face Amount increase, as described above, but the deferred sales
charge imposed will be less than the maximum described above. Upon such a
surrender, the deferred sales charge will not exceed 29% of premiums associated
with the increase, up to one Guideline Annual Premium (for the increase), plus
9% of premiums associated with the increase in excess of one Guideline Annual
Premium, but less than the maximum number of Guideline Annual Premiums (for the
increase) subject to the deferred sales charge. See "APPENDIX D -- CALCULATION
OF MAXIMUM SURRENDER CHARGES." The premiums associated with the increase are
determined as described below.
Additional premium payments may not be required to fund a requested increase in
Face Amount. Therefore, a special rule, which is based on relative Guideline
Annual Premium payments, applies to allocate a portion of existing Policy Value
to the increase and to allocate subsequent premium payments between the initial
Policy and the increase. For example, suppose the Guideline Annual Premium is
equal to $1,500 before an increase and is equal to $2,000 as a result of the
increase. The Policy Value on the effective date of the increase would be
allocated 75% ($1,500/$2,000) to the initial Face Amount and 25% to the
increase. All future premiums would also be allocated 75% to the initial Face
Amount and 25% to the increase. Thus, existing Policy Value associated with the
increase will equal the portion of Policy Value allocated to the increase on the
effective date of the increase, before any deductions are made. Premiums
associated with the increase will equal the portion of the premium payments
actually made on or after the effective date of the increase which are allocated
to the increase.
See "APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES," for examples
illustrating the calculation of the maximum surrender charge for the initial
Face Amount and for any increases, as well as for the surrender charge based on
actual premiums paid or associated with any increases.
A surrender charge may be deducted on a decrease in the Face Amount. In the
event of a decrease, the surrender charge deducted is a fraction of the charge
that would apply to a full surrender of the Policy. The fraction will be
determined by dividing the amount of the decrease by the current Face Amount and
multiplying the result by the surrender charge. If more than one surrender
charge is in effect (i.e.,
pursuant to one or more increases in the Face Amount of a Policy), the surrender
charge will be applied in the following order: (1) the most recent increase; (2)
the next most recent increases successively, and (3) the initial Face Amount.
Where a decrease causes a partial reduction in an increase or in the initial
Face Amount, a proportionate share of the surrender charge for that increase or
for the initial Face Amount will be deducted.
CHARGES ON PARTIAL WITHDRAWAL -- After the first policy year, partial
withdrawals of Surrender Value may be made. The minimum withdrawal is $500.
Under Option 1, the Face Amount is reduced by the amount of the partial
withdrawal, and a partial withdrawal will not be allowed if it would reduce the
Face Amount below $40,000.
A transaction charge which is the smaller of 2% of the amount withdrawn or $25
will be assessed on each partial withdrawal to reimburse the Company for the
cost of processing the withdrawal. The Company does not expect to make a profit
on this charge.
A partial withdrawal charge may also be deducted from Policy Value. For each
partial withdrawal you may withdraw an amount equal to 10% of the Policy Value
on the date the written withdrawal request is received by the Company less the
total of any prior withdrawals in that Policy year which were not subject to the
Partial Withdrawal charge, without incurring a partial withdrawal charge. Any
partial withdrawal in excess of this amount ("excess withdrawal") will be
subject to the partial withdrawal charge. The partial withdrawal charge is equal
to 5% of the excess withdrawal up to the amount of the surrender charge(s) on
the date of withdrawal.
40
<PAGE>
This right is not cumulative from Policy year to Policy year. For example, if
only 8% of Policy Value were withdrawn in Policy year two, the amount you could
withdraw in subsequent Policy years would not be increased by the amount you did
not withdraw in the second Policy year.
The Policy's outstanding surrender charge will be reduced by the amount of the
partial withdrawal charge deducted, by proportionately reducing the deferred
sales charge component and the deferred administrative charge component. The
partial withdrawal charge deducted will decrease existing surrender charges in
the following order: (1) the most recent increase in Face Amount; (2) the next
most recent increases successively, and (3) the initial Face Amount.
TRANSFER CHARGES -- The first twelve transfers in a Policy year will be free of
charge. Thereafter, a transfer charge of $10 will be imposed for each transfer
request to reimburse the Company for the administrative costs incurred in
processing the transfer request. The Company reserves the right to increase the
charge, but it will never exceed $25. The Company also reserves the right to
change the number of free transfers allowed in a Policy Year. See "THE POLICY --
Transfer Privilege."
You may have automatic transfers of at least $100 a month made on a periodic
basis from (a) Sub-Account 3 or Sub-Account 5 (which invest in the Money Market
Fund and Government Bond Fund of the Trust, respectively) to one or more of the
other Sub-Accounts or (b) reallocate Policy Value among the Sub-Accounts. The
first automatic transfer counts as one transfer towards the twelve free
transfers allowed in each policy year. Each subsequent automatic transfer is
without charge and does not reduce the remaining number of transfers which may
be made without charge.
If you utilize the Conversion Privilege, Loan Privilege or reallocate Policy
Value within 20 days of the Date of Issue of the Policy, any resulting transfer
of Policy Value from the Sub-Accounts to the General Account will be free of
charge, and in addition to the twelve free transfers in a Policy year. See "THE
POLICY -- Conversion Privileges" and "POLICY LOANS."
CHARGE FOR INCREASE IN FACE AMOUNT -- For each increase in Face Amount you
request, a transaction charge of $50 will be deducted from Policy Value to
reimburse the Company for administrative costs associated with the increase.
This charge is guaranteed not to increase and the Company does not expect to
make a profit on this charge.
OTHER ADMINISTRATIVE CHARGES -- The Company reserves the right to impose a
charge for the administrative costs incurred for changing the Net Premium
allocation instructions, for changing the allocation of any Monthly Deductions
among the various Sub-Accounts, or for a projection of values. No such charges
are currently imposed and any such charge is guaranteed not to exceed $25.
POLICY LOANS
Loans may be obtained by request to the Company on the sole security of this
Policy. The total amount which may be borrowed is the Loan Value. In the first
Policy year, the Loan Value is 75% of Policy Value reduced by applicable
surrender charges as well as Monthly Deductions and interest on Debt to the end
of the Policy year. The Loan Value in the second Policy year and thereafter is
90% of an amount equal to Policy Value reduced by applicable surrender charges.
There is no minimum limit on the amount of the loan. The loan amount will
normally be paid within seven days after the Company receives the loan request
at its Principal Office, but the Company may delay payments under certain
circumstances. See "OTHER POLICY PROVISIONS -- Postponement Of Payments."
A Policy loan may be allocated among the General Account and one or more
Sub-Accounts. If you do not make an allocation, the Company will make a Pro Rata
Allocation based on the amounts in the Accounts on the date the Company receives
the loan request. Policy Value in each Sub-Account equal to the Policy loan
allocated to such Sub-Account will be transferred to the General Account, and
the number of Accumulation Units equal to the Policy Value so transferred will
be cancelled. This will reduce the Policy Value in these Sub-Accounts. These
transactions are not treated as transfers for purposes of the transfer charge.
41
<PAGE>
As long as the Policy is in force, Policy Value in the General Account equal to
the loan amount will be credited with interest at an effective annual yield of
at least 6.00% per year. NO ADDITIONAL INTEREST WILL BE CREDITED TO SUCH POLICY
VALUE.
LOAN INTEREST CHARGED -- Interest accrues daily and is payable in arrears at the
annual rate of 8%. Interest is due and payable at the end of each Policy year or
on a pro rata basis for such shorter period as the loan may exist. Interest not
paid when due will be added to the loan amount and bear interest at the same
rate. After the due and unpaid interest is added to loan amount, if the new loan
amount exceeds the Policy Value in the General Account, the Company will
transfer Policy Value equal to that excess loan amount from the Policy Value in
each Sub-Account to the General Account as security for the excess loan amount.
The Company will allocate the amount transferred among the Sub-Accounts in the
same proportion that the Policy Value in each Sub-Account bears to the total
Policy Value in all Sub-Accounts.
REPAYMENT OF DEBT -- Loans may be repaid at any time prior to the lapse of the
Policy. Upon repayment of Debt, the portion of the Policy Value that is in the
General Account securing the Debt repaid will be allocated to the various
Accounts and increase the Policy Value in such accounts in accordance with your
instructions. If you do not make a repayment allocation, the Company will
allocate Policy Value in accordance with your most recent premium allocation
instructions; provided, however, that loan repayments allocated to the VEL II
Account cannot exceed Policy Value previously transferred from the VEL II
Account to secure the Debt.
If Debt exceeds the Policy Value less the surrender charge, the Policy will
terminate. A notice of such pending termination will be mailed to the last known
address of you and any assignee. If you do not make sufficient payment within 62
days after this notice is mailed, the Policy will terminate with no value. See
"POLICY TERMINATION AND REINSTATEMENT."
EFFECT OF POLICY LOANS -- Although Policy loans may be repaid at any time prior
to the lapse of the Policy, Policy loans will permanently affect the Policy
Value and Surrender Value, and may permanently affect the Death Proceeds. The
effect could be favorable or unfavorable, depending upon whether the investment
performance of the Sub-Account(s) is less than or greater than the interest
credited to the Policy Value in the General Account attributable to the loan.
Moreover, outstanding Policy loans and the accrued interest will be deducted
from the proceeds payable upon the death of the Insured or surrender.
POLICY TERMINATION AND REINSTATEMENT
TERMINATION -- The failure to make premium payments will not cause the Policy to
lapse unless: (a) the Surrender Value is insufficient to cover the next Monthly
Deduction plus loan interest accrued; or (b) Debt exceeds the Policy Value less
surrender charges. If one of these situations occurs, the Policy will be in
default. You will then have a grace period of 62 days, measured from the date of
default, to make sufficient payments to prevent termination. On the date of
default, the Company will send a notice to you and to any assignee of record.
The notice will state the amount of premium due and the date on which it is due.
The Company will also send a notice to you at least 15 days and not more than 45
days prior to the end of the grace period if the surrender value is not adequate
to prevent lapse.
Failure to make a sufficient payment within the grace period will result in
termination of the Policy. If the Insured dies during the grace period, the
Death Proceeds will still be payable, but any Monthly Deductions due and unpaid
through the policy month in which the Insured dies and any other overdue charge
will be deducted from the Death Proceeds.
Except for the situation described in (b) above, if, during the first 48 months
after the Date of Issue or the effective date of an increase in Face Amount, you
make premium payments, less Debt, partial withdrawals and partial withdrawal
charges, at least equal to the sum of the Minimum Monthly Factors for the number
of months the Policy, increase, or Policy Change which causes a change in the
42
<PAGE>
Minimum Monthly Factor has been in force, the Policy is guaranteed not to lapse
during that period. A Policy Change which causes a change in the Minimum Monthly
Factor is a change in the Face Amount or the addition or deletion of a rider.
Except for the first 48 months after the Date of Issue or the effective date of
an increase, payments equal to the Minimum Monthly Factor do not guarantee that
the Policy will remain in force.
REINSTATEMENT -- If the Policy has not been surrendered and the Insured is
alive, the terminated Policy may be reinstated anytime within 3 years after the
date of default and before the Final Premium Payment Date. The reinstatement
will be effective on the Monthly Payment Date following the date you submit the
following to the Company: (1) a written application for reinstatement; (2)
Evidence of Insurability showing that the Insured is insurable according to the
Company's underwriting rules; and (3) a premium that, after the deduction of the
tax expense charge, is large enough to cover the minimum amount payable, as
described below.
MINIMUM AMOUNT PAYABLE -- If reinstatement is requested when less than 48
Monthly Deductions have been made since the Date of Issue or the effective date
of an increase in the Face Amount, you must pay the lesser of the amount shown
in A or B:
Under A, the minimum amount payable is the Minimum Monthly Factor for the
three-month period beginning on the date of reinstatement.
Under B, the minimum amount payable is the sum of
- the amount by which the surrender charge as of the date of reinstatement
exceeds the Policy Value on the date of default; plus
- Monthly Deductions for the three-month period beginning on the date of
reinstatement.
If reinstatement is requested after 48 Monthly Deductions have been made since
the Date of Issue of the policy or any increase in the Face Amount, you must pay
the amount shown in B above. The Company reserves the right to increase the
Minimum Monthly Factor upon reinstatement.
SURRENDER CHARGE -- The surrender charge on the date of reinstatement is the
surrender charge which would have been in effect had the Policy remained in
force from the Date of Issue. The Policy Value less Debt on the date of default
will be restored to the Policy to the extent it does not exceed the surrender
charge on the date of reinstatement. Any Policy Value less Debt as of the date
of default which exceeds the surrender charge on the date of reinstatement will
not be restored.
POLICY VALUE ON REINSTATEMENT -- The Policy Value on the date of reinstatement
is:
- the Net Premium paid to reinstate the Policy increased by interest from
the date the payment was received at the Company's Principal Office;
- plus an amount equal to the Policy Value less Debt on the date of default
to the extent it does not exceed the surrender charge on the date of
reinstatement;
- minus the Monthly Deduction due on the date of reinstatement.
You may not reinstate any Debt outstanding on the date of default or
foreclosure.
OTHER POLICY PROVISIONS
The following Policy provisions may vary in certain states in order to comply
with requirements of the insurance laws, regulations, and insurance regulatory
agencies in those states.
POLICYOWNER -- The Policyowner is the Insured unless another Policyowner has
been named in the application for the Policy. The Policyowner is generally
entitled to exercise all rights under a Policy while the Insured is alive,
subject to the consent of any irrevocable Beneficiary (the consent of a
revocable Beneficiary is not required). The consent of the Insured is required
whenever the Face Amount of insurance is increased.
43
<PAGE>
BENEFICIARY -- The Beneficiary is the person or persons to whom the insurance
proceeds are payable upon the Insured's death. Unless otherwise stated in the
Policy, the Beneficiary has no rights in the Policy before the death of the
Insured. While the Insured is alive, you may change any Beneficiary unless you
have declared a Beneficiary to be irrevocable. If no Beneficiary is alive when
the Insured dies, the owner (or the owner's estate) will be the Beneficiary. If
more than one Beneficiary is alive when the Insured dies, they will be paid in
equal shares, unless you have chosen otherwise. Where there is more than one
Beneficiary, the interest of a Beneficiary who dies before the Insured will pass
to surviving Beneficiaries proportionally.
INCONTESTABILITY -- The Company will not contest the validity of a Policy after
it has been in force during the Insured's lifetime for two years from the Date
of Issue. The Company will not contest the validity of any increase in the Face
Amount after such increase or rider has been in force during the Insured's
lifetime for two years from its effective date.
SUICIDE -- The Death Proceeds will not be paid if the Insured commits suicide
within two years from the Date of Issue. Instead, the Company will pay the
Beneficiary an amount equal to all premiums paid for the Policy, without
interest, less any outstanding Debt and less any partial withdrawals. If the
Insured commits suicide generally within two years from the effective date of
any increase in the Sum Insured, the Company's liability with respect to such
increase will be limited to a refund of the cost thereof. The Beneficiary will
receive the administrative charges and insurance charges paid for such increase.
AGE AND SEX -- If the Insured's Age or sex as stated in the application for a
Policy is not correct, benefits under a Policy will be adjusted to reflect the
correct Age and sex, if death occurs prior to the Final Premium Payment Date.
The adjusted benefit will be that which the most recent cost of insurance charge
would have purchased for the correct Age and sex. In no event will the Sum
Insured be reduced to less than the Guideline Minimum Sum Insured.
ASSIGNMENT -- The owner may assign a Policy as collateral or make an absolute
assignment of the Policy. All rights under the Policy will be transferred to the
extent of the assignee's interest. The Consent of the assignee may be required
in order to make changes in premium allocations, to make transfers, or to
exercise other rights under the Policy. The Company is not bound by an
assignment or release thereof, unless it is in writing and is recorded at the
Company's Principal Office. When recorded, the assignment will take effect as of
the date the written request was signed. Any rights created by the assignment
will be subject to any payments made or actions taken by the Company before the
assignment is recorded. The Company is not responsible for determining the
validity of any assignment or release.
POSTPONEMENT OF PAYMENTS -- Payments of any amount due from the VEL II Account
upon surrender, partial withdrawals, or death of the Insured, as well as
payments of a Policy loan and transfers may be postponed whenever: (a) the New
York Stock Exchange is closed other than customary weekend and holiday closings,
or (b) an emergency exists, as determined by the SEC, as a result of which
disposal of securities is not reasonably practicable or it is not reasonably
practicable to determine the value of the VEL II Account's net assets. Payments
under the Policy of any amounts derived from the premiums paid by check may be
delayed until such time as the check has cleared your bank.
The Company also reserves the right to defer payment of any amount due from the
General Account upon surrender, partial withdrawal or death of the Insured, as
well as payments of policy loans and transfers from the General Account, for a
period not to exceed six months. (No payment will be deferred to pay premiums on
policies with the Company.) If payment is not mailed or delivered within ten
days of receipt of your written request, the Company will pay interest at least
equal to an effective annual yield of 3 1/2% per year for the period of
deferment; however, no interest will be paid if less than $25 or the delay in
payment is pursuant to state law.
44
<PAGE>
DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY
<TABLE>
<CAPTION>
POSITION WITH THE COMPANY AND
NAME PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS
- ------------------------------------------ ---------------------------------------------------------------------
<S> <C>
Bruce C. Anderson Director of First Allmerica since 1996; Vice President, First
Allmerica
Abigail M. Armstrong Secretary of First Allmerica since 1996; Counsel, First Allmerica
Kruno Huitzingh Director of First Allmerica since 1996; Vice President & Chief
Information Officer, First Allmerica since 1993; Executive Vice
President, Chicago Board Options Exchange, 1986 to 1993
John P. Kavanaugh Director of First Allmercia since 1996; Vice President of First
Allmerica since 1991
John F. Kelly Director of First Allmerica since 1996; Senior Vice President,
General Counsel and Assistant Secretary, First Allmerica
James R. McAuliffe Director of First Allmerica since 1996; President and CEO, Citizens
Insurance Company of America since 1994; Vice President from 1982 to
1994 and Chief Investment Officer, First Allmerica, 1986 to 1994
John F. O'Brien Director, Chairman of the Board, President and Chief Executive
Officer of First Allmerica
Edward J. Parry, III Vice President and Treasurer, First Allmerica since 1993; Assistant
Vice President, 1992 to 1993; Manager, Price Waterhouse, 1987 to
1992
Richard M. Reilly Director of First Allmerica since 1996; Vice President, First
Allmerica; Director, Allmerica Investments, Inc.; Director and
President, Allmerica Investment Management Company, Inc. since 1990.
Larry C. Renfro Director of First Allmerica since 1996; Vice President of First
Allmerica
Theodore J. Rupley Director of First Allmerica since 1996; Director and President, The
Hanover Insurance Company since 1992; President, Fountain Powerboats
Industries, 1992; President, Metropolitan Property & Casualty
Company, 1986-1992.
Phillip E. Soule Director of First Allmerica since 1996; Vice President of First
Allmerica
Eric A. Simonsen Director of First Allmerica since 1996; Vice President and Chief
Financial Officer, First Allmerica
</TABLE>
DISTRIBUTION
Allmerica Investments, Inc. an indirect wholly owned subsidiary of the Company,
acts as the principal underwriter of the Policies pursuant to a Sales and
Administrative Services Agreement with the Company and the VEL II Account.
Allmerica Investments, Inc. is registered with the Securities and Exchange
Commission as a broker-dealer and is a member of the National Association of
Securities Dealers ("NASD"). The Policies are sold by agents of the Company who
are registered representatives of Allmerica Investments, Inc. or of certain
independent broker-dealers which are members of the NASD.
The Company pays registered representatives who sell the Policy commissions
based on a commission schedule. After issue of the Policy or an increase in Face
Amount, commissions generally will equal 50
45
<PAGE>
percent of the first year premiums up to a basic premium amount established by
the Company. Thereafter, commissions will generally equal 4 percent of any
additional premiums. Certain registered representatives, including registered
representatives enrolled in the Company's training program for new agents, may
receive additional first year and renewal commissions and training
reimbursements. General Agents of the Company and certain registered
representatives may also be eligible to receive expense reimbursements based on
the amount of earned commissions. General Agents may also receive overriding
commissions, which will not exceed 10 percent of first year or 14 percent of
renewal premiums.
The Company intends to recoup the commission and other sales expense through a
combination of the deferred sales charge component of the anticipated surrender
and partial withdrawal charges, and the investment earnings on amounts allocated
to accumulate on a fixed basis in excess of the interest credited on fixed
accumulations by the Company. There is no additional charge to Policy Owners or
the Separate Account. Any surrender charge assessed on a Policy will be retained
by the Company except for amounts it may pay to Allmerica Investments, Inc. for
services it performs and expenses it may incur as principal underwriter and
general distributor.
REPORTS
The Company will maintain the records relating to the VEL II Account. You will
be promptly sent statements of significant transactions such as premium
payments, changes in specified Face Amount, changes in Sum Insured Option,
transfers among Sub-Accounts and the General Account, partial withdrawals,
increases in loan amount by you, loan repayments, lapse, termination for any
reason, and reinstatement. An annual statement will also be sent to you within
30 days after a Policy Anniversary. The annual statement will summarize all of
the above transactions and deductions of charges during the Policy year. It will
also set forth the status of the Death Proceeds, Policy Value, Surrender Value,
amounts in the Sub-Accounts and General Account, and any Policy loan(s).
In addition, you will be sent periodic reports containing financial statements
and other information for the VEL II Account and the Underlying Investment
Companies as required by the Investment Company Act of 1940.
LEGAL PROCEEDINGS
There are no legal proceedings pending to which the VEL II Account is a party,
or to which the assets of the VEL II Account are subject. The Company is not
involved in any litigation that is of material importance in relation to its
total assets or that relates to the VEL II Account.
FURTHER INFORMATION
A Registration Statement under the Securities Act of 1933 relating to this
offering has been filed with the Securities and Exchange Commission. Certain
portions of the Registration Statement and amendments have been omitted from
this prospectus pursuant to the rules and regulations of the Securities and
Exchange Commission. Statements contained in this prospectus concerning the
Policy and other legal documents are summaries. The complete documents and
omitted information may be obtained from the Securities and Exchange
Commission's principal office in Washington, D.C., upon payment of the
Securities and Exchange Commission's prescribed fees.
INDEPENDENT ACCOUNTANTS
The financial statements of the Company as of December 31, 1995 and 1994 and for
each of the three years in the period ended December 31, 1995 and of the VEL II
Account of First Allmerica Financial Life Insurance Company as of December 31,
1995 and the period then ended, included in this Prospectus 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
Policies.
46
<PAGE>
FEDERAL TAX CONSIDERATIONS
The effect of federal income taxes on the value of a Policy, on loans,
withdrawals, or surrenders, on death benefit 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 the present
federal income tax laws as they are currently interpreted. From time to time
legislation is proposed which, if passed, could significantly, adversely and
possibly retroactively affect the taxation of the Policies. No representation is
made regarding the likelihood of continuation of current federal income tax laws
or of current interpretations by the Internal Revenue Service (IRS). Moreover,
no attempt has been made to consider any applicable state or other tax laws.
It should be recognized that the following summary of federal income tax aspects
of amounts received under the Policies is not exhaustive, does not purport to
cover all situations and is not intended as tax advice. Specifically, the
discussion below does not address certain tax provisions that may be applicable
if the Policyowner is a corporation or the Trustee of an employee benefit plan.
A qualified tax adviser should always be consulted with regard to the
application of law to individual circumstances.
THE COMPANY AND THE VEL II ACCOUNT -- The Company is taxed as a stock life
insurance company under Subchapter L of the Internal Revenue Code of 1986 (the
"Code") and files a consolidated tax return with its affiliates. The Company
does not expect to incur any income tax upon the earnings or realized capital
gains attributable to the VEL II Account. Based on these expectations, no charge
is made for federal income taxes which may be attributable to the VEL II
Account.
The Company will review periodically the question of a charge to the VEL II
Account for federal income taxes. Such a charge may be made in future years for
any federal income taxes incurred by the Company. This might become necessary if
the tax treatment of the Company is ultimately determined to be other than what
the Company believes it to be, if there are changes made in the federal income
tax treatment of variable life insurance at the Company level, or if there is a
change in the Company's tax status. Any such charge would be designed to cover
the federal income taxes attributable to the investment results of the VEL II
Account.
Under current laws the Company may also incur state and local taxes (in addition
to premium taxes) in several states. At present these taxes are not significant.
If there is a material change in applicable state or local tax laws, charges may
be made for such taxes paid, or reserves for such taxes, attributable to the VEL
II Account.
TAXATION OF THE POLICIES -- The Company believes that the Policies described in
this prospectus will be considered life insurance contracts under Section 7702
of the Code, which generally provides for the taxation of life insurance
policies and places limitations on the relationship of the Policy Value to the
Insurance Amount at Risk. As a result, the Death Proceeds payable are excludable
from the gross income of the Beneficiary. Moreover, any increase in Policy Value
is not taxable until received by the Policyowner or the Policyowner's designee.
But see "MODIFIED ENDOWMENT CONTRACTS."
The Code also requires that the investment of each Sub-Account be adequately
diversified in accordance with Treasury regulations in order to be treated as a
life insurance policy for tax purposes. Although the Company does not have
control over the investments of the Underlying Funds, the Company believes that
the Underlying Funds currently meet the Treasury's diversification requirements,
and the Company will monitor continued compliance with these requirements. In
connection with the issuance of previous regulations relating to diversification
requirements, the Treasury Department announced that such regulations do not
provide guidance concerning the extent to which Policyowners may direct their
investments to particular divisions of a separate account. Regulations in this
regard may be issued in the future. It is possible that if and when regulations
are issued, the Policies may need to be modified to comply with such
regulations. For these reasons, the Policies or the Company's administrative
rules may be modified as necessary to prevent a Policyowner from being
considered the owner of the assets of the VEL II Account.
47
<PAGE>
The Company believes that loans received under a Policy will be treated as
indebtedness of the Policyowner for federal tax purposes, and under current law
will not constitute income to the Policyowner so long as the Policy remains in
force. But see "MODIFIED ENDOWMENT CONTRACTS." Deducting interest on policy
loans is, however, subject to the restrictions of Section 264 of the Code.
Consumer interest paid on Policy loans under a Policy owned by an individual is
not tax deductible. In addition, no tax deduction is allowed for any interest on
any loan under one or more life insurance policies (purchased after June 20,
1986) owned by a taxpayer covering the life of any individual who is an officer
or employee of or is financially interested in, any business carried on by that
taxpayer, to the extent the aggregate amount of such loans exceeds $50,000.
Depending upon the circumstances, a surrender, partial withdrawal, change in the
Sum Insured Option, change in the Face Amount, lapse with policy loan
outstanding, or assignment of the Policy may have tax consequences. In
particular, under specified conditions, a distribution under the Policy during
the first fifteen years from Date of Issue that reduces future benefits under
the Policy will be taxed to the Policyowner as ordinary income to the extent of
any investment earnings in the Policy. Federal, state and local income, estate,
inheritance, and other tax consequences of ownership or receipt of Policy
proceeds depend on the circumstances of each Insured, Policyowner, or
Beneficiary.
MODIFIED ENDOWMENT CONTRACTS -- The Technical and Miscellaneous Revenue Act of
1988 ("Act") adversely affects the tax treatment of distributions under
so-called "modified endowment contracts." Under the Act, any life insurance
policy, including a Policy offered by this prospectus, that fails to satisfy a
"7-pay" test is considered a modified endowment contract. A Policy fails to
satisfy the 7-pay test if the cumulative premiums paid under the Policy at any
time during the first seven policy years exceeds the sum of the net level
premiums that would have been paid, had the Policy provided for paid-up future
benefits after the payment of seven level premiums.
If a Policy is considered a modified endowment contract, all distributions under
the Policy will be taxed on an "income first" basis. Most distributions received
by a Policyowner directly or indirectly (including loans, withdrawals, partial
surrenders, or the assignment or pledge of any portion of the value of the
Policy) will be includible in gross income to the extent that the cash Surrender
Value of the Policy exceeds the Policyowner's investment in the contract. Any
additional amounts will be treated as a return of capital to the extent of the
Policyowner's basis in the Policy. With certain exceptions, an additional 10%
tax will be imposed on the portion of any distribution that is includible in
income. All modified endowment contracts issued by the same insurance company to
the same policyowner during any 12-month period will be treated as a single
modified endowment contract in determining taxable distributions.
Currently, each Policy is reviewed when premiums are received to determine if it
satisfies the 7-pay test. If the Policy does not satisfy the 7-pay test, the
Company will notify the Policyowner of the option of requesting a refund of the
excess premium, with interest at the General Account interest rate in effect
when the premium was paid. The refund process must be completed within 60 days
after the Policy anniversary, or the Policy will be permanently classified as a
modified endowment contract.
MORE INFORMATION ABOUT THE GENERAL ACCOUNT
As discussed earlier, you may allocate Net Premiums and transfer Policy Value to
the General Account. Because of exemption and exclusionary provisions in the
securities laws, any amount in the General Account is not generally subject to
regulation under the provisions of the Securities Act of 1933 or the Investment
Company Act of 1940. Accordingly, the disclosures in this Section have not been
reviewed by the Securities and Exchange Commission. Disclosures regarding the
fixed portion of the Policy and the General Account may, however, be subject to
certain generally applicable provisions of the Federal securities laws
concerning the accuracy and completeness of statements made in prospectuses.
GENERAL DESCRIPTION -- 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
48
<PAGE>
Account become part of the assets of the Company and are used to support
insurance and annuity obligations. Subject to applicable law, the Company has
sole discretion over the investment of assets of the General Account.
A portion or all of Net Premiums may be allocated or transferred to accumulate
at a fixed rate of interest in the General Account. Such net amounts are
guaranteed by the Company as to principal and a minimum rate of interest. The
allocation or transfer of funds to the General Account does not entitle you to
share in the investment experience of the General Account.
GENERAL ACCOUNT VALUE -- The Company bears the full investment risk for amounts
allocated to the General Account and guarantees that interest credited to each
Policyowner's Policy Value in the General Account will not be less than an
annual rate of 4% ("Guaranteed Minimum Rate").
The Company may, AT ITS SOLE DISCRETION, credit a higher rate of interest
("excess interest"), although it is not obligated to credit interest in excess
of 4% per year, and might not do so. However, the excess interest rate, if any,
in effect on the date a premium is received at the Principal Office is
guaranteed on that premium for one year, unless the Policy Value associated with
the premium becomes security for a Policy loan. AFTER SUCH INITIAL ONE YEAR
GUARANTEE OF INTEREST ON NET PREMIUM, ANY INTEREST CREDITED ON THE POLICY'S
ACCUMULATED VALUE IN THE GENERAL ACCOUNT IN EXCESS OF THE GUARANTEED MINIMUM
RATE PER YEAR WILL BE DETERMINED IN THE SOLE DISCRETION OF THE COMPANY. THE
POLICYOWNER ASSUMES THE RISK THAT INTEREST CREDITED MAY NOT EXCEED THE
GUARANTEED MINIMUM RATE.
Even if excess interest is credited to accumulated value in the General Account,
no excess interest will be credited to that portion of the Policy Value which is
equal to Debt. However, such Policy Value will be credited interest at an
effective annual yield of at least 6%.
The Company guarantees that, on each Monthly Payment Date, the Policy Value in
the General Account will be the amount of the Net Premiums allocated or Policy
Value transferred to the General Account, plus interest at an annual rate of 4%
per year, plus any excess interest which the Company credits, less the sum of
all Policy charges allocable to the General Account and any amounts deducted
from the General Account in connection with loans, partial withdrawals,
surrenders or transfers.
THE POLICY -- This prospectus describes a flexible premium variable life
insurance policy and is generally intended to serve as a disclosure document
only for the aspects of the Policy relating to the VEL II Account. For complete
details regarding the General Account, see the Policy itself.
TRANSFERS, SURRENDERS, PARTIAL WITHDRAWALS AND POLICY LOANS -- If a Policy is
surrendered or if a partial withdrawal is made, a surrender charge or partial
withdrawal charge, as applicable, may be imposed. In the event of a decrease in
Face Amount, the surrender charge deducted is a fraction of the charge that
would apply to a full surrender of the Policy. Partial withdrawals are made on a
last-in/first-out basis from Policy Value allocated to the General Account.
The first six transfers in a policy year are free of charge. Thereafter, a $10
transfer charge will be deducted for each transfer in that Policy year. The
transfer privilege is subject to the consent of the Company and to the Company's
then current rules.
Policy loans may also be made from the Policy Value in the General Account.
Transfers, surrenders, partial withdrawals, Death Proceeds and Policy loans
payable from the General Account may be delayed up to six months. However, if
payment is delayed for 10 days or more, the Company will pay interest at least
equal to an effective annual yield of 3 1/2% per year for the period of
deferment. Amounts from the General Account used to pay premiums on policies
with the Company will not be delayed.
49
<PAGE>
FINANCIAL STATEMENTS
Financial Statements for the Company and for the VEL II Account are included in
this prospectus beginning immediately after this section. The financial
statements of the Company should be considered only as bearing on the ability of
the Company to meet its obligations under the Policy. They should not be
considered as bearing on the investment performance of the assets held in the
VEL II Account.
50
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
FINANCIAL STATEMENTS
DECEMBER 31, 1995
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
First Allmerica Financial Life Insurance Company
(formerly known as State Mutual Life Assurance Company of America)
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,
1995 and 1994, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1995, 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 (Notes 1 and 3) and
postemployment benefits (Notes 11) in 1994 and for postretirement benefits (Note
10) in 1993.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Boston, Massachusetts
February 5, 1996
F-1
<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
----------------------------------
1995 1994 1993
---------- ---------- ----------
(IN MILLIONS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
REVENUES
Premiums............................................................. $ 2,222.8 $ 2,181.8 $ 2,079.3
Universal life and investment product policy fees.................... 170.4 156.8 143.7
Net investment income................................................ 710.1 743.1 782.8
Net realized investment gains........................................ 19.1 1.1 61.0
Realized gain on sale of subsidiary.................................. -- -- 35.7
Realized gain on sale of mutual fund processing business............. 20.7 -- --
Realized gain on issuance of subsidiary common stock................. -- -- 62.9
Other income......................................................... 95.4 112.3 73.8
---------- ---------- ----------
Total revenues................................................... 3,238.5 3,195.1 3,239.2
---------- ---------- ----------
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims, losses and loss adjustment expenses......... 2,008.3 2,047.0 1,987.2
Policy acquisition expenses.......................................... 470.3 475.7 435.8
Other operating expenses............................................. 455.0 518.9 421.3
---------- ---------- ----------
Total benefits, losses and expenses.............................. 2,933.6 3,041.6 2,844.3
---------- ---------- ----------
Income before federal income taxes..................................... 304.9 153.5 394.9
---------- ---------- ----------
FEDERAL INCOME TAX EXPENSE (BENEFIT)
Current.............................................................. 119.7 45.4 95.1
Deferred............................................................. (37.0) 8.0 (20.4)
---------- ---------- ----------
Total federal income tax expense................................. 82.7 53.4 74.7
---------- ---------- ----------
Income before minority interest, extraordinary item, and cumulative
effect of accounting change........................................... 222.2 100.1 320.2
Minority interest...................................................... (73.1) (51.0) (122.8)
---------- ---------- ----------
Income before extraordinary item and cumulative effect of accounting
changes............................................................... 149.1 49.1 197.4
Extraordinary item - demutualization expenses.......................... (12.1) (9.2) (4.6)
Cumulative effect of changes in accounting principles.................. -- (1.9) (35.4)
---------- ---------- ----------
Net income............................................................. $ 137.0 $ 38.0 $ 157.4
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1995 1994
--------- ---------
(IN MILLIONS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Investments:
Fixed maturities-at amortized cost (fair value of $949.9 in 1994)..................... $ -- $ 959.3
Fixed maturities-at fair value (amortized cost of $7,467.9 and $6,724.6).............. 7,739.3 6,512.0
Equity securities-at fair value (cost of $410.6 and $260.4)........................... 517.2 286.4
Mortgage loans........................................................................ 799.5 1,106.7
Real estate........................................................................... 179.6 180.3
Policy loans.......................................................................... 123.2 364.9
Other long-term investments........................................................... 71.9 68.1
--------- ---------
Total investments................................................................... 9,430.7 9,477.7
--------- ---------
Cash and cash equivalents............................................................... 236.6 539.7
Accrued investment income............................................................... 163.0 186.6
Deferred policy acquisition costs....................................................... 735.7 802.8
--------- ---------
Reinsurance receivables:
Future policy benefits................................................................ 97.1 59.7
Outstanding claims, losses and loss adjustment expenses............................... 799.6 741.0
Unearned premiums..................................................................... 43.8 61.9
Other................................................................................. 58.9 62.1
--------- ---------
Total reinsurance receivables....................................................... 999.4 924.7
--------- ---------
Deferred federal income taxes........................................................... 81.2 189.1
Premiums, accounts and notes receivable................................................. 526.7 510.3
Other assets............................................................................ 361.4 324.9
Closed Block assets..................................................................... 818.9 --
Separate account assets................................................................. 4,348.8 2,965.7
--------- ---------
Total assets........................................................................ $17,702.4 $15,921.5
--------- ---------
--------- ---------
LIABILITIES
Policy liabilities and accruals:
Future policy benefits................................................................ $ 2,639.3 $ 3,416.4
Outstanding claims, losses and loss adjustment expenses............................... 3,081.3 2,991.5
Unearned premiums..................................................................... 800.9 796.6
Contractholder deposit funds and other policy liabilities............................. 2,737.4 3,435.7
--------- ---------
Total policy liabilities and accruals............................................... 9,258.9 10,640.2
--------- ---------
Expenses and taxes payable............................................................ 600.3 589.2
Reinsurance premiums payable.......................................................... 42.0 65.8
Short-term debt....................................................................... 28.0 32.8
Deferred federal income taxes......................................................... 47.8 13.8
Long-term debt........................................................................ 2.8 2.7
Closed Block liabilities.............................................................. 902.0 --
Separate account liabilities.......................................................... 4,337.8 2,954.9
--------- ---------
Total liabilities................................................................... 15,219.6 14,299.4
--------- ---------
Minority interest..................................................................... 758.5 629.7
Commitments and contingencies (Notes 14 and 19)
SHAREHOLDERS' EQUITY
Common stock, $10 par value, 1 million shares authorized, 500,000 shares issued and
outstanding.......................................................................... 5.0 --
Additional paid-in-capital............................................................ 392.4 --
Unrealized appreciation (depreciation) on investments, net............................ 153.0 (79.0)
Retained earnings..................................................................... 1,173.9 1,071.4
--------- ---------
Total shareholders' equity.......................................................... 1,724.3 992.4
--------- ---------
Total liabilities and shareholders' equity.......................................... $17,702.4 $15,921.5
--------- ---------
--------- ---------
</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 STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
----------------------------------
1995 1994 1993
---------- ---------- ----------
(IN MILLIONS)
<S> <C> <C> <C>
COMMON STOCK
Balance at beginning of year............................................... $ -- $ -- $ --
Demutualization transaction................................................ 5.0 -- --
---------- ---------- ----------
Balance at end of year..................................................... 5.0 -- --
---------- ---------- ----------
ADDITIONAL PAID-IN-CAPITAL
Balance at beginning of year............................................... -- -- --
Contributed from parent.................................................... 392.4 -- --
---------- ---------- ----------
Balance at end of year..................................................... 392.4 -- --
---------- ---------- ----------
RETAINED EARNINGS
Balance at beginning of year............................................... 1,071.4 1,033.4 876.0
Net income prior to demutualization........................................ 93.2 38.0 157.4
---------- ---------- ----------
1,164.6 1,071.4 1,033.4
Demutualization transaction................................................ (34.5) -- --
Net income subsequent to demutualization................................... 43.8 -- --
---------- ---------- ----------
Balance at end of year..................................................... 1,173.9 1,071.4 1,033.4
---------- ---------- ----------
NET UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENTS
Balance at beginning of year............................................... (79.0) 17.5 20.6
---------- ---------- ----------
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......... 466.0 (492.1) (9.6)
(Provision) benefit for deferred federal income taxes.................... (163.1) 171.9 2.8
Minority interest........................................................ (83.7) 76.7 3.7
---------- ---------- ----------
219.2 (243.5) (3.1)
---------- ---------- ----------
Balance at end of year................................................... 153.0 (79.0) 17.5
---------- ---------- ----------
Total shareholders' equity............................................. $ 1,724.3 $ 992.4 $ 1,050.9
---------- ---------- ----------
---------- ---------- ----------
</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 CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
-------------------------------
1995 1994 1993
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................................... $ 137.0 $ 38.0 $ 157.4
Adjustments to reconcile net income to net cash provided by operating
activities:
Minority interest........................................................... 73.1 50.1 112.7
Net realized gains.......................................................... (39.8) (1.1) (159.6)
Deferred federal income taxes (benefits).................................... (37.0) 8.0 (20.4)
Increase in deferred policy acquisition costs............................... (38.4) (34.6) (51.8)
Increase in premiums and notes receivable, net of reinsurance payable....... (42.0) (25.6) (37.5)
(Increase) decrease in accrued investment income............................ 7.0 4.6 (1.6)
Increase in policy liabilities and accruals, net............................ 116.2 175.9 131.7
(Increase) decrease in reinsurance receivable............................... (75.6) (31.9) 18.6
Increase in expenses and taxes payable...................................... 7.5 88.0 104.7
Separate account activity, net.............................................. (0.1) 0.4 21.4
Other, net.................................................................. 23.9 59.9 2.7
--------- --------- ---------
Net cash provided by operating activities................................. 131.8 331.7 278.3
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals and maturities of available-for-sale fixed
maturities................................................................... 2,738.4 2,097.8 --
Proceeds from disposals of held-to-maturity fixed maturities.................. 271.3 304.4 2,094.9
Proceeds from disposals of equity securities.................................. 120.0 143.9 585.8
Proceeds from disposals of other investments.................................. 40.5 25.9 74.0
Proceeds from mortgages matured or collected.................................. 230.3 256.4 291.2
Purchase of available-for-sale fixed maturities............................... (3,273.3) (2,150.1) --
Purchase of held-to-maturity fixed maturities................................. -- (111.6) (2,577.1)
Purchase of equity securities................................................. (254.0) (172.2) (673.3)
Purchase of other investments................................................. (24.8) (26.6) (46.5)
Proceeds from sale of businesses.............................................. 32.9 -- 79.5
Capital expenditures.......................................................... (14.1) (43.1) (37.5)
Other investing activities, net............................................... 4.7 2.4 1.3
--------- --------- ---------
Net cash (used in) provided by investing activities....................... (128.1) 327.2 (207.7)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits and interest credited to contractholder deposit funds................ 445.8 786.3 738.7
Withdrawals from contractholder deposit funds................................. (1,069.9) (1,187.0) (894.0)
Change in short-term debt..................................................... (4.8) (6.0) 1.4
Change in long-term debt...................................................... 0.2 0.3 --
Dividends paid to minority shareholders....................................... (4.1) (4.2) (3.9)
Capital contributed from parent............................................... 392.4 -- 156.2
Payments for policyholders' membership interests.............................. (27.9) -- --
Net proceeds from issuance of long-term debt.................................. -- -- --
Other, net.................................................................... (20.9) -- (1.3)
--------- --------- ---------
Net cash used in financing activities........................................... (289.2) (410.6) (2.9)
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents............................ (285.5) 248.3 67.7
Net change in cash held in the Closed Block..................................... (17.6) -- --
Cash and cash equivalents, beginning of year.................................... 539.7 291.4 223.7
--------- --------- ---------
Cash and cash equivalents, end of year.......................................... $ 236.6 $ 539.7 $ 291.4
--------- --------- ---------
--------- --------- ---------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid................................................................. $ 4.1 $ 4.3 $ 1.7
Income taxes paid............................................................. $ 90.6 $ 46.1 $ 57.3
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<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 58.3%-owned non-insurance holding company). The Closed Block assets and
liabilities at December 31, 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 as of December 31, 1995 and the year 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 81.1%-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.
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 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.
F-6
<PAGE>
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 an
enterprise classify debt and equity securities into one of three categories;
held-to-maturity, available-for-sale, or trading. Investments classified as
held-to-maturity shall be investments that the enterprise has the positive
intent and ability to hold until maturity. Trading securities are investments
which are bought and held principally for the purpose of selling them in the
near term. Investments classified as neither trading securities nor
held-to-maturity shall be classified as available-for-sale securities. SFAS No.
115 also requires that unrealized holding gains and losses for trading
securities be included in earnings, while unrealized gains and losses for
available-for-sale securities be excluded from earnings and reported as a
separate component of shareholder equity until realized. SFAS No. 115 also
requires that for a decline in the fair value which is judged to be other than
temporary, the cost basis of the security should be written down to fair value,
and the amount of the write-down recognized in earnings as a realized loss.
Previously, the Company classified all of its fixed maturities and equity
securities as available-for-sale or held-to-maturity investments. Fixed
maturities held-to-maturity consist of certain bonds, presented at amortized
cost, that management intends and has the ability to hold until maturity. Fixed
maturities available-for-sale consist of certain bonds and redeemable preferred
stocks, presented at fair value, that management may not hold until maturity.
Equity securities available-for-sale are comprised of common stocks which are
carried at fair value. Prior to January 1, 1994, all fixed maturity investments,
which included bonds and redeemable preferred stocks, were principally carried
at amortized cost. Equity securities, which included common and non-redeemable
preferred stock, were carried at fair value. Unrealized gains or losses on
investments classified as available-for-sale, net of deferred federal income
taxes, minority interest, deferred policy acquisition expenses and
F-7
<PAGE>
amounts attributable to participating contractholders, are included as a
separate component of shareholders' equity. As discussed in Note 3, the Company
transferred all securities classified as held-to-maturity to available-for-sale
on November 30, 1995.
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.
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 include 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
F-8
<PAGE>
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.
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
shareholders' 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.
F-9
<PAGE>
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.
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. 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%, 6.4% and 6.6% of total life, health and
annuity statutory premiums prior to demutualization in 1995, 1994 and 1993,
respectively. Total policyholders' dividends were $23.3 million, $32.8 million
and $24.2 million prior to demutualization in 1995, 1994 and 1993, 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 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
F-10
<PAGE>
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. Management expects
that adoption of this statement will not have 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
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
received proceeds of $32.1 million. A gain of $13.5 million, net of taxes of
$7.2 million, was recorded in March 1995.
In March and April, 1993, Citizens Corporation, a newly formed holding company
for Citizens, issued approximately 19.35% of its common stock in an initial
public offering, generating net proceeds of $156.2 million (7.0 million shares
at $24.00 per share). Proceeds to Citizens Corporation were reduced by
underwriting and other stock issuance costs. A non-taxable gain of $62.9 million
was recorded in 1993 in connection with this initial public offering. This gain
is non-taxable because only newly-issued shares of Citizens Corporation were
issued to the public.
Effective December 31, 1992, Hanover entered into a definitive agreement to sell
its wholly owned subsidiary, Beacon Insurance Company of America, and its wholly
owned subsidiary, American Select Insurance Company, for $89.7 million. A gain
of $20.7 million, net of taxes of $15.0 million, was recorded in 1993.
3. INVESTMENTS
A. FIXED MATURITIES AND EQUITY SECURITIES
Effective January 1, 1994, the Company adopted SFAS No. 115, which 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 shareholders' 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
shareholders' equity of $12.8 million.
F-11
<PAGE>
The amortized cost and fair value of available-for-sale and held-to-maturity
fixed maturities and equity securities were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST (1) GAINS LOSSES VALUE
---------- ----------- ----------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
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
U.S. government mortgage-backed securities..................... 337.6 8.6 2.1 344.1
Total fixed maturities available-for-sale........................ $ 7,467.9 $ 294.5 $ 23.1 $ 7,739.3
---------- ----------- ----- ----------
Equity securities................................................ $ 410.6 $ 111.7 $ 5.1 $ 517.2
---------- ----------- ----- ----------
---------- ----------- ----- ----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1994
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST (1) GAINS LOSSES VALUE
---------- ----------- ----------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
U.S. Treasury securities and U.S. government and agency
securities...................................................... $ 280.2 $ 4.8 $ 9.1 $ 275.9
States and political subdivisions................................ 2,011.3 14.9 76.2 1,950.0
Foreign governments.............................................. 96.8 1.8 12.8 85.8
Corporate fixed maturities....................................... 4,201.4 24.7 157.4 4,068.7
U.S. government mortgage-backed securities..................... 134.9 0.4 3.7 131.6
---------- ----------- ----- ----------
Total fixed maturities available-for-sale........................ $ 6,724.6 $ 46.6 $ 259.2 $ 6,512.0
---------- ----------- ----- ----------
---------- ----------- ----- ----------
Equity securities................................................ $ 260.4 $ 35.3 $ 9.3 $ 286.4
---------- ----------- ----- ----------
---------- ----------- ----- ----------
HELD-TO-MATURITY
State and political subdivisions................................. $ 8.1 $ 0.1 $ 0.8 7.4
Foreign governments.............................................. 20.7 0.2 0.2 20.7
Corporate fixed maturities....................................... 927.3 13.7 22.5 918.5
Corporate mortgage-backed securities............................. 3.2 0.1 -- 3.3
---------- ----------- ----- ----------
Total fixed maturities held-to-maturity.......................... $ 959.3 $ 14.1 $ 23.5 $ 949.9
---------- ----------- ----- ----------
---------- ----------- ----- ----------
</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, 1995, the amortized cost and market value of assets
on deposit were $295.0 million and $303.6 million, respectively. At December 31,
1994, the amortized cost and market value of assets on deposit were $327.9
million and $323.5 million, respectively. In addition, fixed maturities,
excluding those securities on deposit in New York, with an amortized cost of
$82.2 million and $67.0 million were on deposit with various state and
governmental authorities at December 31, 1995 and 1994, respectively.
F-12
<PAGE>
There were approximately $21.8 million of contractual fixed maturity investment
commitments at December 31, 1994 and none at December 31, 1995.
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>
DECEMBER 31, 1995
----------------------
AMORTIZED FAIR
COST VALUE
---------- ----------
(IN MILLIONS)
<S> <C> <C>
AVAILABLE-FOR-SALE
Due in one year or less........................................................ $ 970.8 $ 975.6
Due after one year through five years.......................................... 3,507.9 3,657.1
Due after five years through ten years......................................... 1,794.0 1,866.0
Due after ten years............................................................ 1,195.2 1,240.6
---------- ----------
Total...................................................................... $ 7,467.9 $ 7,739.3
---------- ----------
---------- ----------
</TABLE>
The proceeds from sales of available-for-sale securities and the gross realized
gains and gross realized losses on those sales were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
--------------------------------------
PROCEEDS FROM
SALES OF
AVAILABLE-FOR-SALE GROSS GROSS
SECURITES GAINS LOSSES
---------------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
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-13
<PAGE>
Unrealized gains and losses on available-for-sale and other securities, are
summarized as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
-------------------------------------
EQUITY
FIXED SECURITIES
MATURITIES AND OTHER (1) TOTAL
----------- ------------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
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 17.5 164.5
----------- ------ ---------
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
Benefit for deferred federal income taxes and minority interest............. 238.3 10.3 248.6
----------- ------ ---------
Net appreciation (depreciation), end of year................................ $ (89.4) $ 10.4 $ (79.0)
----------- ------ ---------
----------- ------ ---------
</TABLE>
- ------------------------
(1) Includes net appreciation on other investments of $6.9 million and $0.6
million in 1995 and 1994, respectively.
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.
F-14
<PAGE>
The carrying values of mortgage loans and real estate investments net of
applicable reserves were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1995 1994
--------- ----------
(IN MILLIONS)
<S> <C> <C>
Mortgage loans......................................................... $ 799.5 $ 1,106.7
--------- ----------
Real estate:
Held for sale........................................................ 168.9 134.5
Held for production of income........................................ 10.7 45.8
--------- ----------
Total real estate.................................................... 179.6 180.3
--------- ----------
Total mortgage loans and real estate................................... $ 979.1 $ 1,287.0
--------- ----------
--------- ----------
</TABLE>
Reserves for mortgage loans were $33.8 million and $47.2 million as of December
31, 1995 and 1994, respectively.
During 1995, 1994 and 1993, non-cash investing activities included real estate
acquired through foreclosure of mortgage loans, which had a fair value of $26.1
million, $39.2 million and $26.7 million, respectively.
At December 31, 1995, contractual commitments to extend credit under commercial
mortgage loan agreements amounted to approximately $8.2 million in the Closed
Block. These commitments generally expire within one year. There are no
contractual commitments to extend credit under commercial mortgage loan
agreements outside the Closed Block.
Mortgage loans and real estate investments comprised the following property
types and geographic regions:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1995 1994
--------- ----------
(IN MILLIONS)
<S> <C> <C>
Property type:
Office building...................................................... $ 435.9 $ 553.6
Residential.......................................................... 145.3 207.3
Retail............................................................... 205.6 246.5
Industrial / warehouse............................................... 93.8 144.1
Other................................................................ 151.9 205.6
Valuation allowances................................................. (53.4) (70.1)
--------- ----------
Total.................................................................. $ 979.1 $ 1,287.0
--------- ----------
--------- ----------
Geographic region:
South Atlantic....................................................... $ 281.4 $ 374.2
Pacific.............................................................. 191.9 238.7
East North Central................................................... 118.2 138.5
Middle Atlantic...................................................... 148.9 151.2
West South Central................................................... 79.7 102.3
New England.......................................................... 94.9 103.1
Other................................................................ 117.5 249.1
Valuation allowances................................................. (53.4) (70.1)
--------- ----------
Total.................................................................. $ 979.1 $ 1,287.0
--------- ----------
--------- ----------
</TABLE>
At December 31, 1995, scheduled mortgage loan maturities were as follows: 1996
- -- $206.1 million; 1997 -- $143.7 million; 1998 -- $167.4 million; 1999 --
$109.9 million; 2000 -- $124.2 million; and $48.2 million thereafter. Actual
maturities could differ from contractual maturities because borrowers
F-15
<PAGE>
may have the right to prepay obligations with or without prepayment penalties
and loans may be refinanced. During 1995, the Company refinanced $24.0 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 DECEMBER 31
----------------------------------------------------
BALANCE AT BALANCE AT
JANUARY 1 ADDITIONS DEDUCTIONS DECEMBER 31
----------- ----------- ----------- -------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
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
----- ----- ----- -----
----- ----- ----- -----
1993
Mortgage loans........................................ $ 86.7 $ 4.6 $ 17.5 $ 73.8
Real estate........................................... 8.3 12.7 -- 21.0
----- ----- ----- -----
Total............................................... $ 95.0 $ 17.3 $ 17.5 $ 94.8
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
D. FUTURES CONTRACTS
FAFLIC purchases and sells 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 $74.7 million and $126.6 million at December 31, 1995 and 1994,
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 $75.7 million and $126.5 million at
December 31, 1995 and 1994, 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 and (losses)
were $5.6 million, $(7.7) million, and $6.9 million in 1995, 1994 and 1993,
respectively. Gains and losses on hedge contracts that are deemed ineffective by
management are realized immediately.
A reconciliation of the notional amount of futures contracts is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
-------------------------------
1995 1994 1993
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Contracts outstanding, beginning of year.............................. $ 126.6 $ 141.7 $ 120.0
New contracts......................................................... 343.5 816.0 493.3
Contracts terminated.................................................. (395.4) (831.1) $ (471.6)
--------- --------- ---------
Contracts outstanding, end of year.................................... $ 74.7 $ 126.6 $ 141.7
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-16
<PAGE>
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 $104.2 million and $117.5 million at December 31, 1995 and
1994, 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 1995, 1994, and 1993. 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
-------------------------------
1995 1994 1993
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Contracts outstanding, beginning of year................................. $ 118.7 $ 128.8 $ 95.0
New Contracts............................................................ -- 5.0 50.8
Contracts expired........................................................ -- (10.1) (17.0)
Contracts terminated..................................................... (14.1) (5.0) --
--------- --------- ---------
Contracts outstanding, end of year....................................... $ 104.6 $ 118.7 $ 128.8
--------- --------- ---------
--------- --------- ---------
</TABLE>
Expected maturities of foreign currency swap contracts are $36.0 million in
1996, $28.8 million in 1997, and $39.8 million in 1998 and thereafter.
F. OTHER
At December 31, 1995, FAFLIC had no concentration of investments in a single
investee exceeding 10% of shareholders' equity.
4. INVESTMENT INCOME AND GAINS AND LOSSES
A. NET INVESTMENT INCOME
The components of net investment income were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
-------------------------------
1995 1994 1993
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Fixed maturities............................................... $ 554.0 $ 578.3 $ 601.5
Mortgage loans................................................. 97.0 119.9 155.7
Equity securities.............................................. 16.8 12.1 7.1
Policy loans................................................... 20.3 23.3 23.5
Real estate.................................................... 48.5 44.6 43.4
Other long-term investments.................................... 4.4 4.3 2.1
Short-term investments......................................... 21.4 9.5 7.4
--------- --------- ---------
Gross investment income...................................... 762.4 792.0 840.7
Less investment expenses....................................... (52.3) (48.9) (57.9)
--------- --------- ---------
Net investment income........................................ $ 710.1 $ 743.1 $ 782.8
--------- --------- ---------
--------- --------- ---------
</TABLE>
As of December 31, 1995, fixed maturities and mortgage loans on non-accrual
status were $1.4 million and $85.4 million, including restructured loans of
$46.8 million. The effect of non-accruals, compared
F-17
<PAGE>
with amounts that would have been recognized in accordance with the original
terms of the investments, was to reduce net income by $0.6 million, $5.1 million
and $14.0 million in 1995, 1994 and 1993, 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 $98.9 million, $126.8 million and $167.0 million at December
31, 1995, 1994 and 1993, respectively. Interest income on restructured mortgage
loans that would have been recorded in accordance with the original terms of
such loans amounted to $11.1 million, $14.4 million and $18.1 million in 1995,
1994 and 1993, respectively. Actual interest income on these loans included in
net investment income aggregated $7.1 million, $8.2 million and $10.6 million in
1995, 1994 and 1993, respectively.
At December 31, 1995, fixed maturities with a carrying value of $1.4 million
were non-income producing for the twelve months ended December 31, 1995. There
were no mortgage loans which were non-income producing for the twelve months
ended December 31, 1995.
B. REALIZED INVESTMENT GAINS AND LOSSES
Realized gains (losses) on investments were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
-------------------------------
1995 1994 1993
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Fixed maturities................................................. $ (7.0) $ 2.4 $ 48.8
Mortgage loans................................................... 1.4 (12.1) (0.5)
Equity securities................................................ 16.2 12.4 29.8
Real estate...................................................... 5.3 1.4 (14.5)
Other............................................................ 3.2 (3.0) (2.6)
--------- --------- ---------
Net realized investment gains.................................... $ 19.1 $ 1.1 $ 61.0
--------- --------- ---------
--------- --------- ---------
</TABLE>
Proceeds from voluntary sales of investments in fixed maturities were $1,612.3
million, $1,036.5 million and $817.5 million in 1995, 1994 and 1993,
respectively. Realized gains on such sales were $23.7 million, $12.9 million and
$38.8 million; and realized losses were $33.0 million, $21.6 million and $2.6
million for 1995, 1994 and 1993, 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, 1995 and 1994.
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.
F-18
<PAGE>
EQUITY SECURITIES
Fair values are based on quoted market prices, if available. If a quoted market
price is not available, fair values are estimated using independent pricing
sources or internally developed pricing models.
MORTGAGE LOANS
Fair values are estimated by discounting the future contractual cash flows using
the current rates at which similar loans would be made to borrowers with similar
credit ratings. The fair value of below investment grade mortgage loans are
limited to the lesser of the present value of the cash flows or book value.
REINSURANCE RECEIVABLES
The carrying amount reported in the consolidated balance sheets approximates
fair 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.
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>
DECEMBER 31
----------------------------------------------
1995 1994
---------------------- ----------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
---------- ---------- ---------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents..................................... $ 236.6 $ 236.6 $ 539.7 $ 539.7
Fixed maturities.............................................. 7,739.3 7,739.3 7,471.3 7,461.9
Equity securities............................................. 517.2 517.2 286.4 286.4
Mortgage loans................................................ 799.5 845.4 1,106.7 1,105.8
Policy loans.................................................. 123.2 123.2 364.9 364.9
---------- ---------- ---------- ----------
$ 9,415.8 $ 9,461.7 $ 9,769.0 $ 9,758.7
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
FINANCIAL LIABILITIES
Guaranteed investment contracts............................... $ 1,632.8 $ 1,677.0 $ 2,170.6 $ 2,134.0
Supplemental contracts without life contingencies............. 24.4 24.4 25.3 25.3
Dividend accumulations........................................ 86.2 86.2 84.5 84.5
Other individual contract deposit funds....................... 95.7 92.8 111.3 108.0
Other group contract deposit funds............................ 894.0 902.8 980.3 969.6
Individual annuity contracts.................................. 966.3 810.0 988.9 870.6
Short-term debt............................................... 28.0 28.0 32.8 32.8
Long-term debt................................................ 2.8 2.9 2.7 2.7
---------- ---------- ---------- ----------
$ 3,730.2 $ 3,624.1 $ 4,396.4 $ 4,227.5
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
F-19
<PAGE>
6. CLOSED BLOCK
Included in other income in the Consolidated Statement of Income in 1995 is a
net pre-tax contribution from the Closed Block of $2.9 million. Summarized
financial information of the Closed Block as of September 30, 1995 (date used to
estimate financial information for the date of establishment of October 16,
1995) and December 31, 1995 and for the period October 1, 1995 through December
31, 1995 is as follows:
<TABLE>
<CAPTION>
1995
---------------------------
DECEMBER 31 SEPTEMBER 30
------------ -------------
(IN MILLIONS)
<S> <C> <C>
ASSETS
Fixed maturities, at fair value (amortized cost of $447.4 and $313.3,
respectively)........................................................... $ 458.0 $ 318.4
Mortgage loans........................................................... 57.1 61.6
Policy loans............................................................. 242.4 245.3
Cash and cash equivalents................................................ 17.6 12.3
Accrued investment income................................................ 16.6 15.3
Deferred policy acquisition costs........................................ 24.5 24.8
Other assets............................................................. 2.7 6.4
------------ -------------
Total assets............................................................... $ 818.9 $ 684.1
------------ -------------
------------ -------------
LIABILITIES
Policy liabilities and accruals.......................................... $ 899.2 $ 894.3
Other liabilities........................................................ 2.8 4.2
------------ -------------
Total liabilities.......................................................... $ 902.0 $ 898.5
------------ -------------
------------ -------------
</TABLE>
F-20
<PAGE>
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 1
THROUGH
DECEMBER 31
1995
------------
(IN
MILLIONS)
<S> <C>
Revenues
Premiums................................................................................ $ 11.5
Net investment income................................................................... 12.8
------------
Total revenues............................................................................ 24.3
------------
Benefits and expenses.....................................................................
Policy benefits......................................................................... 20.6
Policy acquisition expenses............................................................. 0.8
------------
Total benefits and expenses............................................................... 21.4
------------
Contribution from the Closed Block........................................................ $ 2.9
------------
------------
Cash flows
Cash flows from operating activities:
Contribution from the Closed Block.................................................... $ 2.9
Initial cash transferred to the Closed Block.......................................... 139.7
Change in deferred policy acquisition costs, net...................................... 0.4
Change in premiums and other receivables.............................................. (0.1)
Change in policy liabilities and accruals............................................. 2.0
Change in accrued investment income................................................... (1.3)
Other, net............................................................................ 0.8
------------
Net cash provided by operating activities............................................... 144.4
------------
------------
Cash flows from investing activities:
Sales, maturities and repayments of investments....................................... 29.0
Purchases of investments.............................................................. (158.8)
Other, net............................................................................ 3.0
------------
Net cash used by investing activities................................................... (126.8)
------------
Change in cash and cash equivalents and ending balance.................................... $ 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 at December 31, 1995.
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.
7. DEBT
Short- and long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1995 1994
--------- ---------
(IN MILLIONS)
<S> <C> <C>
Short-Term
Commercial paper.......................................................... $ 27.7 $ 32.8
Other..................................................................... 0.3 --
--------- ---------
Total short-term debt....................................................... $ 28.0 $ 32.8
--------- ---------
--------- ---------
Long-term debt.............................................................. $ 2.8 $ 2.7
--------- ---------
--------- ---------
</TABLE>
F-21
<PAGE>
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. As of December 31, 1995, the weighted
average interest rate for outstanding commercial paper was 5.8%.
As of December 31, 1995, FAFLIC had approximately $245.0 million in committed
lines of credit provided by U.S. banks, of which $217.3 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 ranging from 0.10% to
0.125% of the available credit. Interest that would be charged for usage of
these lines of credit is based upon negotiated arrangements.
Interest expense was $4.1 million, $4.3 million and $1.6 million in 1995, 1994
and 1993, respectively.
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.
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
-------------------------------
1995 1994 1993
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Federal income tax expense (benefit)
Current........................................................ $ 119.7 $ 45.4 $ 95.1
Deferred....................................................... (37.0) 8.0 (20.4)
--------- --------- ---------
Total...................................................... $ 82.7 $ 53.4 $ 74.7
--------- --------- ---------
--------- --------- ---------
</TABLE>
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
-------------------------------
1995 1994 1993
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Expected federal income tax expense............................ $ 105.6 $ 53.7 $ 138.2
Tax-exempt interest.......................................... (32.2) (35.9) (32.8)
Differential earnings amount................................. (7.6) 35.0 (10.9)
Non-taxable gain............................................. -- -- (22.0)
Dividend received deduction.................................. (4.0) (2.5) (1.3)
Foreign tax credit........................................... (0.7) (0.8) (0.9)
Changes in tax reserve estimates............................. 19.3 4.0 3.5
Other, net................................................... 2.3 (0.1) 0.9
--------- --------- ---------
Federal income tax expense..................................... $ 82.7 $ 53.4 $ 74.7
--------- --------- ---------
--------- --------- ---------
</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,
F-22
<PAGE>
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).
For its 1995 federal income tax return, FAFLIC has estimated that there will be
no tax effect from a differential earnings amount, including the expected effect
of future recomputations by the IRS. 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
--------------------
1995 1994
--------- ---------
(IN MILLIONS)
<S> <C> <C>
Deferred tax (assets) liabilities
AMT carryforwards..................................................... $ (9.8) $ (11.9)
Loss reserve discounting.............................................. (178.3) (187.6)
Deferred acquisition costs............................................ 55.1 54.2
Employee benefit plans................................................ (25.5) (22.0)
Investments, net...................................................... 77.4 (22.7)
Fixed assets.......................................................... 2.5 4.5
Bad debt reserve...................................................... (1.8) (1.8)
Other, net............................................................ (0.8) (1.8)
--------- ---------
Deferred tax asset, net................................................. $ (81.2) $ (189.1)
--------- ---------
--------- ---------
</TABLE>
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
--------------------
1995 1994
--------- ---------
(IN MILLIONS)
<S> <C> <C>
Deferred tax (assets) liabilities
NOL carryforwards..................................................... $ -- $ (3.3)
AMT carryforwards..................................................... -- (1.5)
Loss reserve discounting.............................................. (129.1) (118.2)
Deferred acquisition costs............................................ 169.7 199.0
Differential earnings amount.......................................... -- 27.7
Employee benefit plans................................................ (14.6) (15.4)
Investments, net...................................................... 67.0 (30.9)
Fixed assets.......................................................... (1.7) (0.9)
Bad debt reserve...................................................... (26.3) (27.9)
Other, net............................................................ (17.2) (14.8)
--------- ---------
Deferred tax liability, net............................................. $ 47.8 $ 13.8
--------- ---------
--------- ---------
</TABLE>
Gross deferred income tax assets totaled $405.1 million and $460.7 million at
December 31, 1995 and 1994, respectively. Gross deferred income tax liabilities
totaled $371.1 million and $285.4 million at December 31, 1995 and 1994,
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, 1995, there are no available non-life
net operating loss carryforwards, and there are available alternative minimum
tax credit carryforwards of $9.8 million.
F-23
<PAGE>
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 1988. The IRS has also examined the
Allmerica P&C consolidated group's federal income tax returns through 1988.
Deficiencies asserted with respect to tax years 1977 through 1981 have been paid
and recorded, and the Company has filed a recomputation of such years with
appeals claiming a refund with respect to certain agreed upon issues. The
Company is currently considering its response to certain adjustments proposed by
the IRS with respect to FAFLIC/AFLIAC's federal income tax returns for 1982 and
1983, and to possible adjustments under consideration by the IRS with respect to
Allmerica P&C's federal income tax returns for 1989, 1990, and 1991. 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
1995 allocation was based on 7.0% of each eligible employee's salary.
Continuation of the defined benefit cash balance formula is subject to the
resolution of certain technical issues, and may be subject to receipt of a
favorable determination letter from the IRS that the Company's pension plans, as
amended to reflect the cash balance formula, will continue to satisfy the
requirements of Section 401(a) of the Internal Revenue Code. 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.
Components of net pension expense were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
-------------------------------
1995 1994 1993
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Service cost - benefits earned during the year.................. $ 19.7 $ 13.0 $ 9.8
Interest accrued on projected benefit obligations............... 21.1 20.0 16.9
Actual return on assets......................................... (89.3) (2.6) (15.1)
Net amortization and deferral................................... 66.1 (16.3) (5.8)
--------- --------- ---------
Net pension expense............................................. $ 17.6 $ 14.1 $ 5.8
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-24
<PAGE>
The following table summarizes the combined status of the three pension plans.
At December 31, 1995 and 1994, each plan's projected benefit obligation exceeded
its assets.
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1995 1994
--------- ---------
(IN MILLIONS)
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation.............................................. $ 325.6 $ 221.7
Unvested benefit obligation............................................ 5.0 3.5
--------- ---------
Accumulated benefit obligation........................................... $ 330.6 $ 225.2
--------- ---------
--------- ---------
Pension liability included in Consolidated Balance Sheets:
Projected benefit obligation........................................... $ 367.1 $ 254.6
Plan assets at fair value.............................................. 321.2 239.7
--------- ---------
Plan assets less than projected benefit obligation................... (45.9) (14.9)
Unrecognized net loss from past experience............................. 48.8 42.3
Unrecognized prior service benefit..................................... (13.8) (17.3)
Unamortized transition asset........................................... (26.5) (28.3)
--------- ---------
Net pension liability.................................................... $ (37.4) $ (18.2)
--------- ---------
--------- ---------
</TABLE>
Determination of the projected benefit obligations was based on a weighted
average discount rate of 7.0% in 1995 and 8.5% in 1994, 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%. The effect of changes
in actuarial assumptions, including the decrease in the weighted average
discount rate, was an increase in the Company's projected benefit obligation of
$76.7 million at December 31, 1995. 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 1995, 1994 and
1993 was $5.2 million, $12.6 million and $22.6 million, respectively. In
addition to this Plan, the Company has a defined contribution plan for
substantially all of its agents. The Plan expense in 1995, 1994 and 1993 was
$3.5 million, $2.7 million and $2.4 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. 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.
Effective January 1, 1993, the Company adopted the provisions of SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions". SFAS
No. 106 requires employers to recognize the costs and obligations of
postretirement benefits other than pensions over the period ending with the date
an employee is fully eligible to receive benefits. Previously, such costs were
generally recognized as expenses when paid. The adoption increased accrued
liabilities by $69.1 million. The effect on the consolidated income statement
was $35.4 million, net of tax of $23.5 million
F-25
<PAGE>
and minority interest of $10.2 million, reported as a cumulative effect of a
change in accounting principle. The ongoing effect of adopting the new standard
increased 1993 net periodic postretirement benefit expense by $6.6 million, and
decreased net income by $4.3 million.
The plans' funded status reconciled with amounts recognized in the Company's
consolidated balance sheet were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1995 1994
--------- ---------
(IN MILLIONS)
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees................................................................. $ 44.9 $ 35.2
Fully eligible active plan participants.................................. 14.0 15.2
Other active plan participants........................................... 45.9 38.5
--------- ---------
104.8 88.9
Plan assets at fair value.................................................. -- --
--------- ---------
Accumulated postretirement benefit obligation in excess of plan assets..... 104.8 88.9
Unrecognized loss.......................................................... 13.4 4.7
--------- ---------
Accrued postretirement benefit costs....................................... $ 91.4 $ 84.2
--------- ---------
--------- ---------
</TABLE>
The components of net periodic postretirement benefit expense were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
-------------------------------
1995 1994 1993
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Service cost........................................................ $ 4.2 $ 6.6 $ 3.8
Interest cost....................................................... 6.9 6.9 5.7
Amortization of (gain) loss......................................... (0.5) 1.4 --
--------- --------- ---
Net periodic postretirement benefit expense......................... $ 10.6 $ 14.9 $ 9.5
--------- --------- ---
--------- --------- ---
</TABLE>
For purposes of measuring the accumulated postretirement benefit obligation at
December 31, 1995, health care costs were assumed to increase 10% in 1996,
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, 1995
by $10.1 million, and the aggregate of the service and interest cost components
of net periodic postretirement benefit expense for 1995 by $1.2 million.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation at January 1, 1993 was 8.5%. The rate was 7.0%
and 8.5% at December 31, 1995 and 1994, respectively. The effect of changes in
actuarial assumptions, including the decrease in the weighted average discount
rate, was an increase in the Company's accumulated postretirement benefit
obligation of $15.1 million at December 31, 1995.
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
F-26
<PAGE>
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. 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, 1996, FAFLIC could pay
dividends of $144.9 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.
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, 1996, AFLIAC could pay dividends of
$4.3 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, 1996, 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 $72.8 million.
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, 1996, Citizens Insurance could pay dividends of
$45.6 million to Citizens Corporation without prior approval.
13. 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
F-27
<PAGE>
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, formerly known as the Employee Benefit 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, formerly known as the Individual 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, formerly included in the results of the Institutional Services
segment, is a Registered Investment Advisor which provides investment advisory
services to other institutions, such as insurance companies and pension plans.
F-28
<PAGE>
Summarized below is financial information with respect to business segments for
the year ended and as of December 31.
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
(IN MILLIONS)
<S> <C> <C> <C>
Revenues:
Risk Management
Regional Property and Casualty............................. $ 2,095.1 $ 2,004.8 $ 2,051.1
Corporate Risk Management.................................. 328.5 302.4 296.0
----------- ----------- -----------
Subtotal................................................. 2,423.6 2,307.2 2,347.1
----------- ----------- -----------
Retirement and Asset Management
Retail Financial Services................................ 486.7 507.9 524.0
Institutional Services................................... 344.1 397.9 382.0
Allmerica Asset Management............................... 4.4 4.0 --
----------- ----------- -----------
Subtotal................................................. 835.2 909.8 906.0
Eliminations............................................... (20.3) (21.9) (13.9)
----------- ----------- -----------
Total................................................ $ 3,238.5 $ 3,195.1 $ 3,239.2
----------- ----------- -----------
----------- ----------- -----------
Income (loss) from continuing operations before income taxes:
Risk Management
Regional Property and Casualty............................. $ 206.3 $ 113.1 $ 331.3
Corporate Risk Management.................................. 18.3 19.9 18.1
----------- ----------- -----------
Subtotal................................................. 224.6 133.0 349.4
----------- ----------- -----------
----------- ----------- -----------
Retirement and Asset Management
Retail Financial Services.................................. 35.2 14.2 61.6
Institutional Services..................................... 42.8 4.4 (16.1)
Allmerica Asset Management................................. 2.3 1.9 --
----------- ----------- -----------
Subtotal................................................. 80.3 20.5 45.5
----------- ----------- -----------
Total................................................ $ 304.9 $ 153.5 $ 394.9
----------- ----------- -----------
----------- ----------- -----------
Identifiable assets:
Risk Management
Regional Property and Casualty............................. $ 5,741.8 $ 5,408.7 $ 5,198.1
Corporate Risk Management.................................. 458.9 386.3 367.6
----------- ----------- -----------
Subtotal................................................. 6,200.7 5,795.0 5,565.7
----------- ----------- -----------
Retirement and Asset Management
Retail Financial Services.................................. 7,218.7 5,639.8 5,104.5
Institutional Services..................................... 4,280.9 4,484.5 4,708.2
Allmerica Asset Management................................. 2.1 2.2 --
----------- ----------- -----------
Subtotal................................................. 11,501.7 10,126.5 9,812.7
----------- ----------- -----------
Total................................................ $ 17,702.4 $ 15,921.5 $ 15,378.4
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
14. LEASE COMMITMENTS
Rental expenses for operating leases, principally with respect to buildings,
amounted to $36.4 million, $35.2 million and $31.9 million in 1995, 1994 and
1993, respectively. At December 31, 1995, future minimum rental payments under
non-cancelable operating leases were approximately $84.6 million, payable as
follows: 1996 -- $29.4 million; 1997 -- $21.5 million; 1998 -- $14.6 million;
1999 -- $8.7 million; 2000 -- $5.5 million; and $4.9 million thereafter.
F-29
<PAGE>
15. 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"). As of December 31, 1995, 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 1995, 1994 and 1993 were $49.1 million and $37.9 million, $50.0 million and
$34.6 million, and $45.0 million and $31.7 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 is currently
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 1995, 1994 and 1993 of $66.8 million and $62.9
million, $80.0 million and $24.2 million, and $76.4 million and $126.8 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-30
<PAGE>
The effects of reinsurance were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
----------------------------------
1995 1994 1993
---------- ---------- ----------
(IN MILLIONS)
<S> <C> <C> <C>
Life insurance premiums:
Direct........................................................... $ 438.9 $ 447.2 $ 453.0
Assumed.......................................................... 71.0 54.3 31.3
Ceded............................................................ (150.3) (111.0) (83.2)
---------- ---------- ----------
Net premiums....................................................... $ 359.6 $ 390.5 $ 401.1
---------- ---------- ----------
---------- ---------- ----------
Property and casualty premiums written:
Direct........................................................... $ 2,039.4 $ 1,992.4 $ 1,906.2
Assumed.......................................................... 125.0 128.6 106.3
Ceded............................................................ (279.1) (298.1) (267.4)
---------- ---------- ----------
Net premiums....................................................... $ 1,885.3 $ 1,822.9 $ 1,745.1
---------- ---------- ----------
---------- ---------- ----------
Property and casualty premiums earned:
Direct........................................................... $ 2,021.7 $ 1,967.1 $ 1,870.1
Assumed.......................................................... 137.7 116.1 114.8
Ceded............................................................ (296.2) (291.9) (306.7)
---------- ---------- ----------
Net premiums....................................................... $ 1,863.2 $ 1,791.3 $ 1,678.2
---------- ---------- ----------
---------- ---------- ----------
Life insurance and other individual policy benefits, claims, losses
and loss adjustment expenses:
Direct........................................................... $ 749.6 $ 773.0 $ 819.4
Assumed.......................................................... 38.5 28.9 6.8
Ceded............................................................ (69.5) (61.6) (38.4)
---------- ---------- ----------
Net policy benefits, claims, losses and loss adjustment expenses... $ 718.6 $ 740.3 $ 787.8
---------- ---------- ----------
---------- ---------- ----------
Property and casualty benefits, claims, losses and loss adjustment
expenses:
Direct........................................................... $ 1,372.7 $ 1,364.4 $ 1,310.3
Assumed.......................................................... 146.1 102.7 98.8
Ceded............................................................ (229.1) (160.4) (209.7)
---------- ---------- ----------
Net policy benefits, claims, losses and loss adjustment expenses... $ 1,289.7 $ 1,306.7 $ 1,199.4
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
16. DEFERRED POLICY ACQUISITION EXPENSES
The following reflects the amount of policy acquisition expenses deferred and
amortized:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
-------------------------------
1995 1994 1993
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Balance at beginning of year...................................... $ 802.8 $ 746.9 $ 700.4
Acquisition expenses deferred................................... 504.8 510.3 482.3
Amortized to expense during the year............................ (470.3) (475.7) (435.8)
Adjustment to equity during the year............................ (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............................................ $ 735.7 $ 802.8 $ 746.9
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-31
<PAGE>
17. LIABILITIES FOR OUTSTANDING CLAIMS, LOSSES AND LOSS ADJUSTMENT EXPENSES
The Company regularly updates its estimates at 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 outstanding claims, losses and loss adjustment expenses
related to the Company's accident and health business was $375.9 million, $305.0
million and $276.3 million at December 31, 1995, 1994 and 1993, respectively.
Accident and health claim liabilities have been re-estimated for all prior years
and were increased by $26.4 million, $6.5 million and $12.7 million in 1995,
1994 and 1993, respectively. 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
----------------------------------
1995 1994 1993
---------- ---------- ----------
(IN MILLIONS)
<S> <C> <C> <C>
Reserve for losses and LAE, beginning of year...................... $ 2,821.7 $ 2,717.3 $ 2,598.9
Incurred losses and LAE, net of reinsurance recoverable:
Provision for insured events of the current year................. 1,427.3 1,434.8 1,268.2
Decrease in provision for insured events of prior years.......... (137.6) (128.1) (68.8)
---------- ---------- ----------
Total incurred losses and LAE...................................... 1,289.7 1,306.7 1,199.4
---------- ---------- ----------
Payments, net of reinsurance recoverable:
Losses and LAE attributable to insured events of current year.... 652.2 650.2 523.5
Losses and LAE attributable to insured events of prior years..... 614.3 566.9 564.3
---------- ---------- ----------
Total payments..................................................... 1,266.5 1,217.1 1,087.8
---------- ---------- ----------
Less reserves assumed by purchaser of Beacon....................... -- -- (28.8)
---------- ---------- ----------
Change in reinsurance recoverable on unpaid losses................. 51.1 14.8 35.6
---------- ---------- ----------
Reserve for losses and LAE, end of year............................ $ 2,896.0 $ 2,821.7 $ 2,717.3
---------- ---------- ----------
---------- ---------- ----------
</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 $137.6 million,
$128.1 million and $68.8 million in 1995, 1994 and 1993, respectively. 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. 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.
The increase in favorable development on prior years' reserves of $59.3 million
in 1994 primarily results from an increase in favorable development in the
voluntary and involuntary pools of $47.0 million in 1994. The remainder of the
favorable reserve development in 1994 is the result of favorable severity
trends, primarily in the personal automobile and commercial multiple peril
lines.
F-32
<PAGE>
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.
Losses and LAE reserves related to environmental damage and toxic tort
liability, included in the total reserve for losses and LAE, were $28.6 million
and $19.4 million, net of reinsurance of $8.4 million and $8.1 million, at the
end of 1995 and 1994, respectively. During 1995, the Regional Property and
Casualty subsidiaries redefined their environmental liabilities in conformity
with new guidelines issued by the NAIC. The 1994 liability has been conformed to
the 1995 presentation. This had no impact on results of operations. Management
believes that, notwithstanding the evolution of case law expanding such
liability, recorded reserves for environmental liability are adequate, and is
not aware of any litigation or pending claims that may result in additional
material liabilities in excess of recorded reserves. 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. At Citizens,
environmental reserves are primarily related to 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. The environmental liability could be revised in the near term if the
estimates used in determining the liability are revised.
18. MINORITY INTEREST
The Company's interest in Allmerica P&C, is represented by ownership of 58.3%,
57.4% and 57.4% of the outstanding shares of common stock at December 31, 1995,
1994 and 1993, respectively. Earnings and shareholders' equity attributable to
minority shareholders are included in minority interest in the consolidated
financial statements.
19. CONTINGENCIES
REGULATORY AND INDUSTRY DEVELOPMENTS
Unfavorable economic conditions have contributed to an increase in the number of
insurance companies that are under regulatory supervision. This is expected to
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 payable
on or before January 1, 1996, 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 Surplus payable in quarterly contributions over ten
years. The smaller carriers have recently 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.
F-33
<PAGE>
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.
20. 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
shareholders' 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>
1995 1994 1993
---------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Statutory net income (Unconsolidated)
Property and Casualty Companies...................................... $ 139.8 $ 74.5 $ 166.8
Life and Health Companies............................................ 134.3 40.7 114.8
---------- --------- ---------
Statutory Shareholders' Surplus (Unconsolidated)
Property and Casualty Companies...................................... $ 1,151.7 $ 989.8 $ 960.1
Life and Health Companies............................................ 965.6 465.3 526.4
---------- --------- ---------
</TABLE>
21. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The quarterly results of operations for 1995 and 1994 are summarized below:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
--------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
----------- --------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C>
1995
Total revenues................................................ $ 841.4 $ 793.4 $ 819.2 $ 784.5
----------- --------- --------- ---------
Income before extraordinary item.............................. $ 39.2 $ 29.9 $ 34.8 $ 45.2
Extraordinary item -- demutualization expenses................ (2.5) (3.5) (4.7) (1.4)
----------- --------- --------- ---------
Net income.................................................... $ 36.7 $ 26.4 $ 30.1 $ 43.8
----------- --------- --------- ---------
----------- --------- --------- ---------
1994
Total revenues................................................ $ 815.4 $ 786.8 $ 799.3 $ 793.6
----------- --------- --------- ---------
Income (loss) before extraordinary item....................... $ (10.9) $ 15.7 $ 26.6 $ 17.7
Extraordinary item -- demutualization expenses................ (1.6) (2.5) (2.8) (2.3)
Cumulative effect of changes in accounting principles......... (1.9) -- -- --
----------- --------- --------- ---------
Net income.................................................... $ (14.4 ) $ 13.2 $ 23.8 $ 15.4
----------- --------- --------- ---------
----------- --------- --------- ---------
</TABLE>
F-34
<PAGE>
VEL II ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES -- DECEMBER 31, 1995
<TABLE>
<CAPTION>
INVESTMENT
GROWTH GRADE INCOME MONEY MARKET EQUITY INDEX
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
1 2 3 4
----------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
ASSETS:
Investment in shares of Allmerica Investment Trust..... $ 199,122 $ 129,784 $ 366,514 $ 107,571
LIABILITIES:
Payable to First Allmerica Financial Life Insurance
Company (Sponsor)..................................... 274 161 955 58
----------- ------------- ------------- ------------
Net assets......................................... $ 198,848 $ 129,623 $ 365,559 $ 107,513
----------- ------------- ------------- ------------
----------- ------------- ------------- ------------
Net asset distribution by category:
Variable life policies............................... $ 198,848 $ 129,623 $ 365,559 $ 107,513
----------- ------------- ------------- ------------
----------- ------------- ------------- ------------
Units outstanding, December 31, 1995................... 149,166 111,480 342,253 75,887
Net asset value per unit, December 31, 1995............ $1.333059 $ 1.162752 $ 1.068095 $ 1.416746
</TABLE>
<TABLE>
<CAPTION>
SELECT SELECT VIPF VIPF
INTERNATIONAL CAPITAL HIGH EQUITY
EQUITY APPRECIATION INCOME INCOME
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
11 12 102 103
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
ASSETS:
Investment in shares of Allmerica Investment Trust........ $ 155,947 $ 111,983 -- --
Investment in shares of Fidelity Variable Insurance
Products Fund............................................ -- -- $ 232,892 $ 676,409
Investment in shares of T. Rowe Price International
Series, Inc.............................................. -- -- -- --
Investment in shares of Delaware Group Premium Fund, Inc.. -- -- -- --
Receivable from First Allmerica Financial Life Insurance
Company (Sponsor)........................................ -- -- 251 361
------------ ------------ ----------- -----------
Total assets.......................................... 155,947 111,983 233,143 676,770
LIABILITIES:
Payable to First Allmerica Financial Life Insurance
Company (Sponsor)........................................ 102 69 -- --
------------ ------------ ----------- -----------
Net assets.............................................. $ 155,845 $ 111,914 $ 233,143 $ 676,770
------------ ------------ ----------- -----------
------------ ------------ ----------- -----------
Net asset distribution by category:
Variable life policies.................................. $ 155,732 $ 111,637 $ 233,143 $ 676,770
Value of investment by First Allmerica Financial Life
Insurance Company (Sponsor)............................ 113 277 -- --
------------ ------------ ----------- -----------
$ 155,845 $ 111,914 $ 233,143 $ 676,770
------------ ------------ ----------- -----------
------------ ------------ ----------- -----------
Units outstanding, December 31, 1995...................... 137,567 80,794 198,246 469,354
Net asset value per unit, December 31, 1995............... $ 1.132869 $ 1.385177 $1.176030 $1.441918
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-35
<PAGE>
VEL II ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
<TABLE>
<CAPTION>
GOVERNMENT SELECT SELECT SELECT SMALL
BOND AGGRESSIVE GROWTH GROWTH GROWTH AND INCOME CAP VALUE
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
5 6 7 8 9
----------- ----------------- ----------- ------------------ -----------
<S> <C> <C> <C> <C> <C>
ASSETS:
Investment in shares of Allmerica
Investment Trust................ $ 185,199 $ 429,068 $ 154,620 $ 157,995 $ 185,815
LIABILITIES:
Payable to First Allmerica
Financial Life Insurance Company
(Sponsor)....................... 147 359 164 142 290
----------- ----------------- ----------- ------------------ -----------
Net assets................... $ 185,052 $ 428,709 $ 154,456 $ 157,853 $ 185,525
----------- ----------------- ----------- ------------------ -----------
----------- ----------------- ----------- ------------------ -----------
Net asset distribution by
category:
Variable life policies......... $ 185,052 $ 428,709 $ 154,456 $ 157,853 $ 185,525
----------- ----------------- ----------- ------------------ -----------
----------- ----------------- ----------- ------------------ -----------
Units outstanding, December 31,
1995............................ 162,785 347,682 125,803 118,937 169,148
Net asset value per unit,
December 31, 1995............... $1.136789 $ 1.233048 $1.227765 $ 1.327197 $1.096824
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-36
<PAGE>
VEL II ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
<TABLE>
<CAPTION>
T. ROWE DGPF
VIPF VIPF VIPF II INTERNATIONAL INTERNATIONAL
GROWTH OVERSEAS ASSET MANAGER STOCK EQUITY
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
104 105 106 150 207
----------- ----------- -------------- ------------------ ------------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Investment in shares of
Allmerica Investment Trust... -- -- -- -- --
Investment in shares of
Fidelity Variable Insurance
Products Fund................ $ 643,055 $ 417,483 $ 312,946 -- --
Investment in shares of T.
Rowe Price International
Series, Inc.................. -- -- -- $ 26,086 --
Investment in shares of
Delaware Group Premium Fund,
Inc.......................... -- -- -- -- $ 164,192
Receivable from First
Allmerica Financial Life
Insurance Company
(Sponsor).................... 553 81 -- -- --
----------- ----------- -------------- ------------------ ------------------
Total assets.............. 643,608 417,564 312,946 26,086 164,192
LIABILITIES:
Payable to First Allmerica
Financial Life Insurance
Company (Sponsor)............ -- -- 328 31 237
----------- ----------- -------------- ------------------ ------------------
Net assets.................. $ 643,608 $ 417,564 $ 312,618 $ 26,055 $ 163,955
----------- ----------- -------------- ------------------ ------------------
----------- ----------- -------------- ------------------ ------------------
Net asset distribution by
category:
Variable life policies...... $ 643,608 $ 417,564 $ 312,504 $ 26,055 $ 163,955
Value of investment by First
Allmerica Financial Life
Insurance Company
(Sponsor).................. -- -- 114 -- --
----------- ----------- -------------- ------------------ ------------------
$ 643,608 $ 417,564 $ 312,618 $ 26,055 $ 163,955
----------- ----------- -------------- ------------------ ------------------
----------- ----------- -------------- ------------------ ------------------
Units outstanding, December
31, 1995..................... 480,189 389,710 273,691 24,722 144,377
Net asset value per unit,
December 31, 1995............ $1.340323 $1.071474 $ 1.142231 $ 1.053908 $ 1.135602
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-37
<PAGE>
VEL II ACCOUNT
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
GROWTH INVESTMENT GRADE INCOME
SUB-ACCOUNT 1 SUB-ACCOUNT 2
-------------------------------------- ----------------------------------------
FOR THE PERIOD FOR THE PERIOD
FOR THE YEAR ENDED 4/6/94* TO FOR THE YEAR ENDED 4/19/94* TO
12/31/95 12/31/94 12/31/95 12/31/94
------------------- ----------------- ------------------- -------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends....................... $ 17,788 $ 1,998 $ 8,047 $ 1,541
EXPENSES:
Mortality and expense risk
fees........................... 1,111 69 1,014 137
Administrative expense fees..... 308 19 282 38
-------- ------- -------- -------
Total expenses.................. 1,419 88 1,296 175
-------- ------- -------- -------
Net investment income......... 16,369 1,910 6,751 1,366
-------- ------- -------- -------
-------- ------- -------- -------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Net realized gain (loss)........ 4,355 6 1,691 (4)
Net unrealized gain (loss)...... 11,702 (1,891) 8,501 (1,166)
-------- ------- -------- -------
Net realized and unrealized gain
(loss) on investments.......... 16,057 (1,885) 10,192 (1,170)
-------- ------- -------- -------
Net increase (decrease) in net
assets from operations......... $ 32,426 $ 25 $ 16,943 $ 196
-------- ------- -------- -------
-------- ------- -------- -------
</TABLE>
<TABLE>
<CAPTION>
MONEY MARKET EQUITY INDEX
SUB-ACCOUNT 3 SUB-ACCOUNT 4
---------------------------------------- ------------------------------------------
FOR THE YEAR ENDED FOR THE PERIOD FOR THE YEAR ENDED FOR THE PERIOD
12/31/95 5/3/94* TO 12/31/94 12/31/95 4/19/94* TO 12/31/94
------------------- ------------------- ------------------- ---------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends....................... $ 19,962 $ 2,989 $ 4,030 $ 551
EXPENSES:
Mortality and expense risk
fees........................... 3,134 563 491 92
Administrative expense fees..... 870 156 136 26
-------- ------- ------- ------
Total expenses................ 4,004 719 627 118
-------- ------- ------- ------
Net investment income....... 15,958 2,270 3,403 433
-------- ------- ------- ------
-------- ------- ------- ------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Net realized gain (loss)........ -- -- 100 1
Net unrealized gain (loss)...... -- -- 10,948 (631)
-------- ------- ------- ------
Net realized and unrealized gain
(loss) on investments.......... -- -- 11,048 (630)
-------- ------- ------- ------
Net increase (decrease) in net
assets from operations......... $ 15,958 $ 2,270 $ 14,451 $ (197)
-------- ------- ------- ------
-------- ------- ------- ------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-38
<PAGE>
VEL II ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
GOVERNMENT BOND
SUB-ACCOUNT 5
----------------------------------------
FOR THE YEAR ENDED FOR THE PERIOD
12/31/95 5/9/94* TO 12/31/94
------------------- -------------------
<S> <C> <C>
INVESTMENT INCOME:
Dividends.............................................................. $ 11,211 $ 2,751
EXPENSES:
Mortality and expense risk fees........................................ 1,678 246
Administrative expense fees............................................ 466 68
-------- -------
Total expenses......................................................... 2,144 314
-------- -------
Net investment income................................................ 9,067 2,437
-------- -------
-------- -------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss)............................................... 1,190 35
Net unrealized gain (loss)............................................. 10,688 (2,305)
-------- -------
Net realized and unrealized gain (loss) on investments................. 11,878 (2,270)
-------- -------
Net increase (decrease) in net assets from operations.................. $ 20,945 $ 167
-------- -------
-------- -------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-39
<PAGE>
VEL II ACCOUNT
SELECT AGGRESSIVE GROWTH SELECT GROWTH
<TABLE>
<CAPTION>
SELECT AGGRESSIVE GROWTH SELECT GROWTH
SUB-ACCOUNT 6 SUB ACCOUNT 7
---------------------------------------- ----------------------------------------
FOR THE YEAR ENDED FOR THE PERIOD FOR THE YEAR ENDED FOR THE PERIOD
12/31/95 4/5/94* TO 12/31/94 12/31/95 4/6/94* TO 12/31/94
------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends......................... -- -- $ 23 $ 113
EXPENSES:
Mortality and expense risk fees... $ 2,474 $ 449 875 45
Administrative expense fees....... 687 125 243 12
-------- ------ -------- -----
Total expenses.................. 3,161 574 1,118 57
-------- ------ -------- -----
Net investment income (loss)...... (3,161) (574) (1,095) 56
-------- ------ -------- -----
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Net realized gain (loss).......... 1,962 (10) 1,381 23
Net unrealized gain (loss)........ 72,394 563 13,793 47
-------- ------ -------- -----
Net realized and unrealized gain
(loss) on investments............ 74,356 553 15,174 70
-------- ------ -------- -----
Net increase (decrease) in net
assets from operations............. $ 71,195 $ (21) $ 14,079 $ 126
-------- ------ -------- -----
-------- ------ -------- -----
</TABLE>
<TABLE>
<CAPTION>
SELECT GROWTH AND INCOME SMALL CAP VALUE
SUB-ACCOUNT 8 SUB-ACCOUNT 9
--------------------------------------- --------------------------------------
FOR THE PERIOD FOR THE PERIOD
FOR THE YEAR ENDED 4/15/94* TO FOR THE YEAR ENDED 4/5/94* TO
12/31/95 12/31/94 12/31/95 12/31/94
------------------- ------------------ ------------------- -----------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends........................ $ 7,647 $ 1,673 $ 6,195 $ 370
EXPENSES:
Mortality and expense risk
fees............................ 876 174 1,266 327
Administrative expense fees...... 244 48 352 91
-------- -------- -------- --------
Total expenses................. 1,120 222 1,618 418
-------- -------- -------- --------
Net investment income (loss)..... 6,527 1,451 4,577 (48)
-------- -------- -------- --------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Net realized gain (loss)......... 390 (24) 2,486 (244)
Net unrealized gain (loss)....... 17,723 (2,617) 14,137 (1,797)
-------- -------- -------- --------
Net realized and unrealized gain
(loss) on investments........... 18,113 (2,641) 16,623 (2,041)
-------- -------- -------- --------
-------- -------- -------- --------
Net increase (decrease) in net
assets from operations.......... $ 24,640 $ (1,190) $ 21,200 $ (2,089)
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-40
<PAGE>
VEL II ACCOUNT
SELECT AGGRESSIVE GROWTH SELECT GROWTH (CONTINUED)
<TABLE>
<CAPTION>
SELECT INTERNATIONAL EQUITY
SUB-ACCOUNT 11
----------------------------------------
FOR THE YEAR ENDED FOR THE PERIOD
12/31/95 5/20/94 TO 12/31/94
------------------- -------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends....................... $ 2,081 $ 31
EXPENSES:
Mortality and expense risk
fees........................... 700 35
Administrative expense fees..... 194 10
-------- ------
Total expenses................ 894 45
-------- ------
Net investment income (loss).... 1,187 (14)
-------- ------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Net realized gain (loss)........ 441 (6)
Net unrealized gain (loss)...... 9,816 (537)
-------- ------
Net realized and unrealized gain
(loss) on investments.......... 10,257 (543)
-------- ------
Net increase (decrease) in net
assets from operations......... $ 11,444 $ (557)
-------- ------
-------- ------
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
F-41
<PAGE>
VEL II ACCOUNT
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SELECT CAPITAL
APPRECIATION VIPF HIGH INCOME
SUB-ACCOUNT 12 SUB-ACCOUNT 102
------------------------- ----------------------------------------
FOR THE PERIOD FOR THE YEAR ENDED FOR THE PERIOD
4/28/95* TO 12/31/95 12/31/95 4/5/94* TO 12/31/94
------------------------- ------------------- -------------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends..................................... $ 2,134 $ 8,429 --
EXPENSES:
Mortality and expense risk fees............... 312 1,535 $ 297
Administrative expense fees................... 87 426 82
-------- -------- ------
Total expenses.............................. 399 1,961 379
-------- -------- ------
Net investment income (loss).................. 1,735 6,468 (379)
-------- -------- ------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Net realized gain (loss)...................... 169 2,195 (38)
Net unrealized gain (loss).................... 12,007 20,200 (163)
-------- -------- ------
Net realized and unrealized gain (loss) on
investments.................................. 12,176 22,395 (201)
-------- -------- ------
Net increase (decrease) in net assets from
operations................................... $ 13,911 $ 28,863 $ (580)
-------- -------- ------
-------- -------- ------
</TABLE>
<TABLE>
<CAPTION>
VIPF EQUITY INCOME VIPF GROWTH
SUB-ACCOUNT 103 SUB-ACCOUNT 104
--------------------------------------- ----------------------------------------
FOR THE YEAR ENDED FOR THE PERIOD FOR THE YEAR ENDED FOR THE PERIOD
12/31/95 4/5/94* TO 12/31/94 12/31/95 4/5/94* TO 12/31/94
------------------ ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends......................... $ 21,950 $ 2,239 $ 1,164
EXPENSES:
Mortality and expense risk fees... 3,803 413 3,677 $ 524
Administrative expense fees....... 1,056 115 1,021 146
---------- ------- -------- -------
Total expenses.................. 4,859 528 4,698 670
---------- ------- -------- -------
Net investment income (loss).... 17,091 1,711 (3,534) (670)
---------- ------- -------- -------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Net realized gain (loss).......... 1,925 129 25,500 101
Net unrealized gain (loss)........ 100,571 1,283 74,665 8,600
---------- ------- -------- -------
Net realized and unrealized gain
(loss) on investments............ 102,496 1,412 100,165 8,701
---------- ------- -------- -------
Net increase (decrease) in net
assets from operations........... $ 119,587 $ 3,123 $ 96,631 $ 8,031
---------- ------- -------- -------
---------- ------- -------- -------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-42
<PAGE>
VEL II ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
VIPF OVERSEAS
SUB-ACCOUNT 105
--------------------------------------
FOR THE PERIOD
FOR THE YEAR ENDED 4/5/94* TO
12/31/95 12/31/94
------------------- -----------------
<S> <C> <C>
INVESTMENT INCOME:
Dividends................................................................ $ 1,981 --
EXPENSES:
Mortality and expense risk fees.......................................... 2,877 $ 724
Administrative expense fees.............................................. 799 201
-------- --------
Total expenses......................................................... 3,676 925
-------- --------
Net investment income (loss)........................................... (1,695) (925)
-------- --------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss)................................................. 6,939 14
Net unrealized gain (loss)............................................... 25,493 (5,398)
-------- --------
Net realized and unrealized gain (loss) on investments................... 32,432 (5,384)
-------- --------
Net increase (decrease) in net assets from operations.................... $ 30,737 $ (6,309)
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-43
<PAGE>
VEL II ACCOUNT
<TABLE>
<CAPTION>
VIPF II ASSET MANAGER
SUB-ACCOUNT 106 T. ROWE INTERNATIONAL STOCK
-------------------------------------- SUB-ACCOUNT 150
FOR THE PERIOD -----------------------------
FOR THE YEAR ENDED 4/6/94* TO FOR THE PERIOD
12/31/95 12/31/94 6/21/95* TO 12/31/95
------------------- ----------------- -----------------------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends..................................... $ 4,679 $ 27 --
EXPENSES:
Mortality and expense risk fees............... 2,345 410 $ 60
Administrative expense fees................... 651 114 17
-------- -------- -----
Total expenses.............................. 2,996 524 77
-------- -------- -----
Net investment income (loss)................ 1,683 (497) (77)
-------- -------- -----
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Net realized gain (loss)...................... 1,938 39 7
Net unrealized gain (loss).................... 36,035 (4,843) 984
-------- -------- -----
Net realized and unrealized gain (loss) on
investments.................................. 37,973 (4,804) 991
-------- -------- -----
Net increase (decrease) in net assets in from
operations................................... $ 39,656 $ (5,301) $ 914
-------- -------- -----
-------- -------- -----
</TABLE>
<TABLE>
<CAPTION>
DGPF INTERNATIONAL EQUITY
SUB-ACCOUNT 207
--------------------------------------
FOR THE PERIOD
FOR THE YEAR ENDED 4/5/94* TO
12/31/95 12/31/94
------------------- -----------------
<S> <C> <C>
INVESTMENT INCOME:
Dividends................................................................ $ 2,054 --
EXPENSES:
Mortality and expense risk fees.......................................... 1,028 $ 150
Administrative expense fees.............................................. 285 42
-------- --------
Total expenses......................................................... 1,313 192
-------- --------
Net investment income (loss)........................................... 741 (192)
-------- --------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss)................................................. 533 (4)
Net unrealized gain (loss)............................................... 13,079 (840)
-------- --------
Net realized and unrealized gain (loss) on investments................... 13,612 (844)
-------- --------
Net increase (decrease) in net assets in from operations................. $ 14,353 $ (1,036)
-------- --------
-------- --------
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
F-44
<PAGE>
VEL II ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
GROWTH INVESTMENT GRADE INCOME
SUB-ACCOUNT 1 SUB-ACCOUNT 2
------------------------------ -------------------------------
PERIOD FROM PERIOD FROM
YEAR ENDED 4/6/94* TO YEAR ENDED 4/19/94* TO
12/31/95 12/31/94 12/31/95 12/31/94
----------- ----------------- ----------- ------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS:
Net investment income.......................... $ 16,369 $ 1,910 $ 6,751 $ 1,366
Net realized gain (loss) from security
transactions.................................. 4,355 6 1,691 (4)
Net unrealized gain (loss) on investments...... 11,702 (1,891) 8,501 (1,166)
----------- -------- ----------- ----------
Net increase (decrease) in net assets from
operations.................................... 32,426 25 16,943 196
----------- -------- ----------- ----------
FROM CAPITAL TRANSACTIONS:
Net premiums................................... 84,927 27,126 46,181 43,549
Terminations................................... (1,044) (1,879) (3,228) (1,473)
Other transfers from (to) the General Account
of First Allmerica Financial Life Insurance
Company (Sponsor)............................. 45,543 11,724 2,432 25,023
----------- -------- ----------- ----------
Net increase in net assets from capital
transactions.................................. 129,426 36,971 45,385 67,099
----------- -------- ----------- ----------
Net increase in net assets..................... 161,852 36,996 62,328 67,295
NET ASSETS:
Beginning of period............................ 36,996 -- 67,295 --
----------- -------- ----------- ----------
End of period.................................. $ 198,848 $ 36,996 $ 129,623 $ 67,295
----------- -------- ----------- ----------
----------- -------- ----------- ----------
</TABLE>
<TABLE>
<CAPTION>
MONEY MARKET EQUITY INDEX
SUB-ACCOUNT 3 SUB-ACCOUNT 4
------------------------------ -------------------------------
PERIOD FROM PERIOD FROM
YEAR ENDED 5/3/94* TO YEAR ENDED 4/19/94* TO
12/31/95 12/31/94 12/31/95 12/31/94
----------- ----------------- ----------- ------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS:
Net investment income.......................... $ 15,958 $ 2,270 $ 3,403 $ 433
Net realized gain (loss) from security
transactions.................................. -- -- 100 1
Net unrealized gain (loss) on investments...... -- -- 10,948 (631)
----------- ----------------- ----------- ----------
Net increase (decrease) in net assets from
operations.................................... 15,958 2,270 14,451 (197)
----------- ----------------- ----------- ----------
FROM CAPITAL TRANSACTIONS:
Net premiums................................... 446,809 368,294 42,559 11,918
Terminations................................... (443) (146) (100) --
Other transfers from (to) the General Account
of First Allmerica Financial Life Insurance
Company (Sponsor)............................. (414,373) (52,810) 24,073 14,809
----------- ----------------- ----------- ----------
Net increase in net assets from capital
transactions.................................. 31,993 315,338 66,532 26,727
----------- ----------------- ----------- ----------
Net increase in net assets..................... 47,951 317,608 80,983 26,530
NET ASSETS:
Beginning of period............................ 317,608 -- 26,530 153,360
----------- ----------------- ----------- ----------
End of period.................................. $ 365,559 $ 317,608 $ 107,513 $ 26,530
----------- ----------------- ----------- ----------
----------- ----------------- ----------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-45
<PAGE>
VEL II ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
GOVERNMENT BOND
SUB-ACCOUNT 5
------------------------------
PERIOD FROM
YEAR ENDED 5/9/94* TO
12/31/95 12/31/94
----------- -----------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS:
Net investment income........................... $ 9,067 $ 2,437
Net realized gain (loss) from security
transactions................................... 1,190 35
Net unrealized gain (loss) on investments....... 10,688 (2,305)
----------- -----------------
Net increase (decrease) in net assets from
operations..................................... 20,945 167
----------- -----------------
FROM CAPITAL TRANSACTIONS:
Net premiums.................................... 24,923 150,537
Terminations.................................... (81) --
Other transfers from (to) the General Account of
First Allmerica Financial Life Insurance
Company (Sponsor).............................. (14,095) 2,656
----------- -----------------
Net increase in net assets from capital
transactions................................... 10,747 153,193
----------- -----------------
Net increase in net assets...................... 31,692 153,360
NET ASSETS:
Beginning of period............................. 153,360 --
----------- -----------------
End of period................................... $ 185,052 $ 153,360
----------- -----------------
----------- -----------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-46
<PAGE>
VEL II ACCOUNT
<TABLE>
<CAPTION>
SELECT AGGRESSIVE GROWTH SELECT GROWTH
SUB-ACCOUNT 6 SUB-ACCOUNT 7
------------------------------ ------------------------------
PERIOD FROM PERIOD FROM
YEAR ENDED 4/5/94* TO YEAR ENDED 4/6/94* TO
12/31/95 12/31/94 12/31/95 12/31/94
----------- ----------------- ----------- -----------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment income (loss).................... $ (3,161) $ (574) $ (1,095) $ 56
Net realized gain (loss) from security
transactions................................... 1,962 (10) 1,381 23
Net unrealized gain (loss) on investments....... 72,394 563 13,793 47
----------- ----------------- ----------- -----------------
Net increase (decrease) in net assets from
operations..................................... 71,195 (21) 14,079 126
----------- ----------------- ----------- -----------------
FROM CAPITAL TRANSACTIONS:
Net premiums.................................... 171,463 81,409 66,424 23,133
Terminations.................................... (2,228) (1,652) (792) (48)
Other transfers from (to) the General Account of
First Allmerica Financial Life Insurance
Company (Sponsor).............................. 51,490 57,053 36,695 14,839
Net increase in net assets from investments by
First Allmerica Financial Life Insurance
Company (Sponsor).............................. -- -- -- --
----------- ----------------- ----------- -----------------
Net increase in net assets from capital
transactions................................... 220,725 136,810 102,327 37,924
----------- ----------------- ----------- -----------------
Net increase in net assets...................... 291,920 136,789 116,406 38,050
NET ASSETS:
Beginning of period............................. 136,789 -- 38,050 --
----------- ----------------- ----------- -----------------
End of period................................... $ 428,709 $ 136,789 $ 154,456 $ 38,050
----------- ----------------- ----------- -----------------
----------- ----------------- ----------- -----------------
</TABLE>
<TABLE>
<CAPTION>
SELECT GROWTH AND INCOME SMALL CAP VALUE
SUB-ACCOUNT 8 SUB-ACCOUNT 9
------------------------------- -------------------------------
PERIOD FROM PERIOD FROM
YEAR ENDED 4/15/94* TO YEAR ENDED 4/05/94* TO
12/31/95 12/31/94 12/31/95 12/31/94
----------- ------------------ ----------- ------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS
Net investment income (loss).................. $ 6,527 $ 1,451 $ 4,577 $ (48)
Net realized gain (loss) from security
transactions................................. 390 (24) 2,486 (244)
Net unrealized gain (loss) on investments..... 17,723 (2,617) 14,137 (1,797)
----------- ---------- ----------- ----------
Net increase (decrease) in net assets from
operations................................... 24,640 (1,190) 21,200 (2,089)
----------- ---------- ----------- ----------
FROM CAPITAL TRANSACTIONS:
Net premiums.................................. 65,999 45,043 102,108 77,321
Terminations.................................. (54) (206) (372) (367)
Other transfers from (to) the General Account
of First Allmerica Financial Life Insurance
Company (Sponsor)............................ 14,335 9,286 (22,257) 9,981
Net increase in net assets from investments by
First Allmerica Financial Life Insurance
Company (Sponsor)............................ -- -- -- --
----------- ---------- ----------- ----------
Net increase in net assets from capital
transactions................................. 80,280 54,123 79,479 86,935
----------- ---------- ----------- ----------
Net increase in net assets.................... 104,920 52,933 100,679 84,846
NET ASSETS:
Beginning of period........................... 52,933 -- 84,846 --
----------- ---------- ----------- ----------
End of period................................. $ 157,853 $ 52,933 $ 185,525 $ 84,846
----------- ---------- ----------- ----------
----------- ---------- ----------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-47
<PAGE>
VEL II ACCOUNT (CONTINUED)
<TABLE>
<CAPTION>
SELECT INTERNATIONAL EQUITY
SUB-ACCOUNT 11
-------------------------------
PERIOD FROM
YEAR ENDED 5/20/94* TO
12/31/95 12/31/94
----------- ------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS:
Net investment income (loss).................. $ 1,187 $ (14)
Net realized gain (loss) from security
transactions................................. 441 (6)
Net unrealized gain (loss) on investments..... 9,816 (537)
----------- ----------
Net increase (decrease) in net assets from
operations................................... 11,444 (557)
----------- ----------
FROM CAPITAL TRANSACTIONS:
Net premiums.................................. 54,409 9,176
Terminations.................................. (309) --
Other transfers from (to) the General Account
of First Allmerica Financial Life Insurance
Company (Sponsor)............................ 76,026 5,556
Net increase in net assets from investments by
First Allmerica Financial Life Insurance
Company (Sponsor)............................ -- 100
----------- ----------
Net increase in net assets from capital
transactions................................. 130,126 14,832
----------- ----------
Net increase in net assets.................... 141,570 14,275
NET ASSETS:
Beginning of period........................... 14,275 --
----------- ----------
End of period................................. $ 155,845 $ 14,275
----------- ----------
----------- ----------
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
F-48
<PAGE>
VEL II ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SELECT CAPITAL
APPRECIATION VIPF HIGH INCOME
SUB-ACCOUNT 12 SUB-ACCOUNT 102
------------------ ------------------------------
PERIOD FROM PERIOD FROM
4/28/95* TO YEAR ENDED 4/5/94* TO
12/31/95 12/31/95 12/31/94
------------------ ----------- -----------------
<S> <C> <C> <C>
INCREASE IN NET ASSETS FROM OPERATIONS:
Net investment income (loss)................................ $ 1,735 $ 6,468 $ (379)
Net realized gain (loss) from security transactions......... 169 2,195 (38)
Net unrealized gain (loss) on investments................... 12,007 20,200 (163)
---------- ----------- --------
Net increase (decrease) in net assets from operations....... 13,911 28,863 (580)
---------- ----------- --------
FROM CAPITAL TRANSACTIONS:
Net premiums................................................ 33,186 137,014 90,016
Terminations................................................ -- (4,400) (714)
Other transfers from (to) the General Account of First
Allmerica Financial Life Insurance Company (Sponsor)....... 64,617 (22,591) 5,535
Net increase in net assets from investments by First
Allmerica Financial Life Insurance Company (Sponsor)....... 200 -- --
---------- ----------- --------
Net increase in net assets from capital transactions........ 98,003 110,023 94,837
---------- ----------- --------
Net increase in net assets.................................. 111,914 138,886 94,257
NET ASSETS:
Beginning of period......................................... -- 94,257 --
---------- ----------- --------
End of period............................................... $ 111,914 $ 233,143 $ 94,257
---------- ----------- --------
---------- ----------- --------
</TABLE>
<TABLE>
<CAPTION>
VIPF EQUITY INCOME VIPF GROWTH
SUB-ACCOUNT 103 SUB-ACCOUNT 104
------------------------------ ------------------------------
PERIOD FROM PERIOD FROM
YEAR ENDED 4/5/94* TO YEAR ENDED 4/5/94* TO
12/31/95 12/31/94 12/31/95 12/31/94
----------- ----------------- ----------- -----------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS FROM OPERATIONS:
Net investment income (loss).................... $ 17,091 $ 1,711 $ (3,534) $ (670)
Net realized gain (loss) from security
transactions................................... 1,925 129 25,500 101
Net unrealized gain (loss) on investments....... 100,571 1,283 74,665 8,600
----------- ----------------- ----------- -----------------
Net increase (decrease) in net assets from
operations..................................... 119,587 3,123 96,631 8,031
----------- ----------------- ----------- -----------------
FROM CAPITAL TRANSACTIONS:
Net premiums.................................... 293,480 130,274 291,237 142,021
Terminations.................................... (5,120) (1,557) (6,100) (2,575)
Other transfers from (to) the General Account of
First Allmerica Financial Life Insurance
Company (Sponsor).............................. 75,382 61,601 45,930 68,433
Net increase in net assets from investments by
First Allmerica Financial Life Insurance
Company (Sponsor).............................. -- -- -- --
----------- ----------------- ----------- -----------------
Net increase in net assets from capital
transactions................................... 363,742 190,318 331,067 207,879
----------- ----------------- ----------- -----------------
Net increase in net assets...................... 483,329 193,441 427,698 215,910
NET ASSETS:
Beginning of period............................. 193,441 -- 215,910 --
----------- ----------------- ----------- -----------------
End of period................................... $ 676,770 $ 193,441 $ 643,608 $ 215,910
----------- ----------------- ----------- -----------------
----------- ----------------- ----------- -----------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-49
<PAGE>
VEL II ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
VIPF OVERSEAS
SUB-ACCOUNT 105
------------------------------
PERIOD FROM
YEAR ENDED 4/5/94* TO
12/31/95 12/31/94
----------- -----------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS FROM OPERATIONS:
Net investment income (loss).................... $ (1,695) $ (925)
Net realized gain (loss) from security
transactions................................... 6,939 14
Net unrealized gain (loss) on investments....... 25,493 (5,398)
----------- -----------------
Net increase (decrease) in net assets from
operations..................................... 30,737 (6,309)
----------- -----------------
FROM CAPITAL TRANSACTIONS:
Net premiums.................................... 203,407 163,685
Terminations.................................... (4,920) (1,640)
Other transfers from (to) the General Account of
First Allmerica Financial Life Insurance
Company (Sponsor).............................. (23,786) 56,390
Net increase in net assets from investments by
First Allmerica Financial Life Insurance
Company (Sponsor).............................. -- --
----------- -----------------
Net increase in net assets from capital
transactions................................... 174,701 218,435
----------- -----------------
Net increase in net assets...................... 205,438 212,126
NET ASSETS:
Beginning of period............................. 212,126 --
----------- -----------------
End of period................................... $ 417,564 $ 212,126
----------- -----------------
----------- -----------------
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
F-50
<PAGE>
VEL II ACCOUNT
<TABLE>
<CAPTION>
VIPF II ASSET T. ROWE INTERNATIONAL
MANAGER SUB-ACCOUNT 150
SUB-ACCOUNT 106 --------------------------------------
--------------- PERIOD FROM PERIOD FROM
YEAR ENDED 4/6/94* TO 6/21/95* TO
12/31/95 12/31/94 12/31/95
--------------- ----------------- -------------------
<S> <C> <C> <C>
INCREASE IN NET ASSETS FROM OPERATIONS:
Net investment income (loss)........................... $ 1,683 $ (497) $ (77)
Net realized gain (loss) from security transactions.... 1,938 39 7
Net unrealized gain (loss) on investments.............. 36,035 (4,843) 984
--------------- ----------------- --------
Net increase (decrease) in net assets from
operations............................................ 39,656 (5,301) 914
--------------- ----------------- --------
FROM CAPITAL TRANSACTIONS:
Net premiums........................................... 153,730 84,953 6,491
Terminations........................................... (287) -- --
Other transfers from (to) the General Account of First
Allmerica Financial Life Insurance Company
(Sponsor)............................................. (69,108) 108,875 18,650
Net increase in net assets from investments by First
Allmerica Financial Life Insurance Company
(Sponsor)............................................. -- 100 --
--------------- ----------------- --------
Net increase in net assets from capital transactions... 84,335 193,928 25,141
--------------- ----------------- --------
Net increase in net assets............................. 123,991 188,627 26,055
NET ASSETS:
Beginning of period.................................... 188,627 -- --
--------------- ----------------- --------
End of period.......................................... $ 312,618 $ 188,627 $ 26,055
--------------- ----------------- --------
--------------- ----------------- --------
</TABLE>
<TABLE>
<CAPTION>
DGPF INTERNATIONAL EQUITY
SUB-ACCOUNT 207
--------------------------------
YEAR ENDED PERIOD FROM
12/31/95 4/5/94* TO 12/31/94
----------- -------------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS FROM OPERATIONS:
Net investment income (loss).................. $ 741 $ (192)
Net realized gain (loss) from security
transactions................................. 533 (4)
Net unrealized gain (loss) on investments..... 13,079 (840)
----------- --------
Net increase (decrease) in net assets from
operations................................... 14,353 (1,036)
----------- --------
FROM CAPITAL TRANSACTIONS:
Net premiums.................................. 99,444 47,581
Terminations.................................. (1,057) --
Other transfers from (to) the General Account
of First Allmerica Financial Life Insurance
Company (Sponsor)............................ (5,037) 9,707
Net increase in net assets from investments by
First Allmerica Financial Life Insurance
Company (Sponsor)............................ -- --
----------- --------
Net increase in net assets from capital
transactions................................. 93,350 57,288
----------- --------
Net increase in net assets.................... 107,703 56,252
NET ASSETS:
Beginning of period........................... 56,252 --
----------- --------
End of period................................. $ 163,955 $ 56,252
----------- --------
----------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-51
<PAGE>
VEL II ACCOUNT
NOTE 1 -- ORGANIZATION
The VEL II Account (VEL II) is a separate investment account of First Allmerica
Financial Life Insurance Company (the Company), established on April 1, 1994 for
the purpose of separating from the general assets of the Company those assets
used to fund the variable portion of flexible premium variable life policies
issued by the Company. Effective October 16, 1995, concurrent with the
demutualization, the Company's name changed from State Mutual Life Assurance
Company of America. Under applicable insurance law, the assets and liabilities
of VEL II are clearly identified and distinguished from the other assets and
liabilities of the Company. VEL II cannot be charged with liabilities arising
out of any other business of the Company.
VEL II is registered as a unit investment trust under the Investment Company Act
of 1940, as amended (the 1940 Act). VEL II currently offers eighteen
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,
of the Variable Insurance Products Fund (VIPF) or the Variable Insurance
Products Fund II (VIPF II) managed by Fidelity Management & Research Company
(Fidelity Management), or of T. Rowe Price International Series, Inc. (T. Rowe)
managed by Price-Fleming, or of the Delaware Group Premium Fund, Inc. (DGPF)
managed by Delaware International Advisors, Ltd. The Trust, VIPF, VIPF II, T.
Rowe, and DGPF (the Funds) are open-end, diversified series management
investment companies registered under the 1940 Act.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS. Security transactions are recorded on the trade date.
Investments held by the Sub-Accounts are stated at the net asset value per share
of the respective investment portfolio of the Trust, VIPF, VIPFII, T. Rowe, or
DGPF. 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, VIPF, VIPFII, T. Rowe, or DGPF 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 VEL II. Therefore, no provision for income taxes has been charged
against VEL II.
F-52
<PAGE>
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, VIPF, VIPFII, T. Rowe, and DGPF at
December 31, 1995 were as follows:
<TABLE>
<CAPTION>
PORTFOLIO
INFORMATION
SUB- INVESTMENT NUMBER OF AGGREGATE NET ASSET
ACCOUNT PORTFOLIO SHARES COST VALUE PER SHARE
- --------- ------------------------------------------------------------ ----------- ------------------- ---------------
<C> <S> <C> <C> <C>
Allmerica Investment Trust:
1 Growth...................................................... 91,508 $ 189,310 $ 2.176
2 Investment Grade Income..................................... 116,190 122,449 1.117
3 Money Market................................................ 366,514 366,514 1.000
4 Equity Index................................................ 58,878 97,254 1.827
5 Government Bond............................................. 174,387 176,817 1.062
6 Select Aggressive Growth.................................... 232,180 356,111 1.848
7 Select Growth............................................... 112,944 140,779 1.369
8 Select Growth and Income.................................... 124,602 142,889 1.268
9 Small Cap Value............................................. 150,093 173,474 1.238
11 Select International Equity................................. 137,278 146,669 1.136
12 Select Capital Appreciation................................. 81,799 99,975 1.369
Fidelity Variable Insurance Products Fund:
102 High Income................................................. 19,327 212,855 12.050
103 Equity Income............................................... 35,102 574,555 19.270
104 Growth...................................................... 22,022 559,790 29.200
105 Overseas.................................................... 24,486 397,389 17.050
Fidelity Variable Insurance Products Fund II:
106 Asset Manager............................................... 19,819 281,754 15.790
T. Rowe Price International Series, Inc.:
150 International Stock......................................... 2,317 25,102 11.260
Delaware Group Premium Fund:
207 International Equity........................................ 12,524 151,953 13.110
</TABLE>
NOTE 4 -- RELATED PARTY TRANSACTIONS
On the date of issue and each monthly payment date thereafter, a monthly charge
is deducted from the policy value to compensate the Company for the cost of
insurance, which varies by policy, the cost of any additional benefits provided
by rider, and a monthly administrative charge of $5. The policyowner may
instruct the Company to deduct this monthly charge from a specific Sub-Account,
but if not so specified, it will be deducted on a pro-rata basis of allocation
which is the same proportion that the policy value in the General Account of the
Company and in each Sub-Account bear to the total policy value. For the years
ended December 31, 1995 and 1994, these monthly deductions from Sub-Account
policy values amounted to $465,796 and $127,002, respectively.
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 mortality and expense risk annual charge may be increased or
decreased by the Board of Directors of the Company once each year, subject to
compliance with applicable state and federal requirements, but the total charge
may not exceed 1.275% per annum. 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 in the daily computation of
unit values but paid to the Company on a monthly basis.
Allmerica Investments, Inc., (Allmerica Investments), a wholly-owned subsidiary
of the Company, is the principal underwriter and general distributor of VEL II,
and does not receive any compensation for sales of VEL II policies. Commissions
are paid to registered representatives of Allmerica Investments and of certain
independent broker-dealers by the Company. As the current series of policies
F-53
<PAGE>
have a contingent deferred sales charge, no deduction is made for sales charges
at the time of the sale. For the years ended December 31, 1995 and 1994, the
Company received $14,169 and $8,186, respectively, for contingent deferred sales
charges applicable to VEL II.
NOTE 5 -- DIVERSIFICATION REQUIREMENTS
Under the provisions of Section 817(h) of the Internal Revenue Code, a variable
life insurance contract, other than a contract issued in connection with certain
types of employee benefit plans, will not be treated as a variable life
insurance 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 VEL II satisfies the current requirements of the
regulations, and it intends that VEL II will continue to meet such requirements.
NOTE 6 -- PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of the Trust, VIPF, VIPFII, T.
Rowe,and DGPF shares by VEL II during the period ended December 31, 1995 were as
follows:
<TABLE>
<CAPTION>
SUB- INVESTMENT
ACCOUNT PORTFOLIO PURCHASES SALES
- --------- ------------------------------------------------------------------------------- ------------- -------------
<C> <S> <C> <C>
Allmerica Investment Trust:
1 Growth......................................................................... $ 199,129 $ 52,390
2 Investment Grade Income........................................................ 88,966 36,734
3 Money Market................................................................... 911,046 862,531
4 Equity Index................................................................... 88,445 18,477
5 Government Bond................................................................ 57,810 37,987
6 Select Aggressive Growth....................................................... 246,641 27,906
7 Select Growth.................................................................. 115,598 13,509
8 Select Growth and Income....................................................... 92,485 5,512
9 Small Cap Value................................................................ 134,301 49,231
11 Select International Equity.................................................... 139,264 7,862
12 Select Capital Appreciation.................................................... 101,670 1,864
Fidelity Variable Insurance Products Fund:
102 High Income.................................................................... 173,612 57,215
103 Equity Income.................................................................. 409,231 28,867
104 Growth......................................................................... 520,953 192,969
105 Overseas....................................................................... 475,112 301,660
Fidelity Variable Insurance Products Fund II:
106 Asset Manager.................................................................. 180,620 94,384
150 International Stock............................................................ 25,726 631
Delaware Group Premium Fund:
207 International Equity........................................................... 106,453 11,638
------------- -------------
Totals......................................................................... $ 4,067,062 $ 1,801,367
------------- -------------
------------- -------------
</TABLE>
F-54
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of First Allmerica
Financial Life Insurance Company and Policyowners
of VEL II Account 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, 5, 6, 7, 8, 9, 11, 12, 102, 103, 104, 105, 106, 150, and 207) constituting
the VEL II Account of First Allmerica Financial Life Insurance Company at
December 31, 1995, the results of each of their operations and the changes in
each of their net assets for the periods indicated, 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, 1995 by correspondence with the Funds, provide a reasonable basis
for the opinion expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
February 23, 1996
F-55
<PAGE>
APPENDIX A -- OPTIONAL BENEFITS
This Appendix is intended to provide only a very brief overview of additional
insurance benefits available by rider. For more information, contact your agent.
The following supplemental benefits are available for issue under the Policies
for an additional charge.
WAIVER OF PREMIUM RIDER
This rider provides that during periods of total disability continuing more than
four months the Company will add to the Policy Value each month an amount
selected by you or the amount needed to pay the Policy charges, whichever is
greater. This value will be used to keep the Policy in force. This benefit is
subject to the Company's maximum issue benefits. Its cost will change yearly.
GUARANTEED INSURABILITY RIDER
This rider guarantees that insurance may be added at various option dates
without Evidence of Insurability. This benefit may be exercised on the option
dates even if the Insured is disabled.
OTHER INSURED RIDER
This rider provides a term insurance benefit for up to five Insureds. At present
this benefit is only available for the spouse and minor children of the primary
Insured. The rider includes a feature that allows the "other Insured" to convert
the coverage to a flexible premium adjustable life insurance policy.
CHILDREN'S INSURANCE RIDER
This rider provides coverage for eligible minor children. It also covers future
children, including adopted children and step children.
ACCIDENTAL DEATH BENEFIT RIDER
This rider pays an additional benefit for death resulting from a covered
accident prior to the Policy anniversary nearest the Insured's Age 70.
EXCHANGE OPTION RIDER
This rider allows you to use the Policy to insure a different person, subject to
Company guidelines.
LIVING BENEFITS RIDER
This rider permits part of the proceeds of the Policy to be available before
death if the Insured becomes terminally ill or is permanently confined to a
nursing home.
A-1
<PAGE>
APPENDIX B -- PAYMENT OPTIONS
PAYMENT OPTIONS -- Upon written request, the Surrender Value or all or part of
the Death Proceeds may be placed under one or more of the payment options below
or any other option offered by the Company. If you do not make an election, the
Company will pay the benefits in a single sum. A certificate will be provided to
the payee describing the payment option selected.
If a payment option is selected, the Beneficiary may pay to the Company any
amount that would otherwise be deducted from the Sum Insured.
The amounts payable under a payment option for each $1,000 value applied will be
the greater of:
(a) the rate per $1,000 of value applied based on the Company's non-guaranteed
current payment option rates for the Policies; or
(b) the rate in the Policy for the applicable payment option.
The following payment options are currently available. The amounts payable under
these options are paid from the General Account. None are based on the
investment experience of the VEL II Account.
Option A: PAYMENTS FOR A SPECIFIED NUMBER OF YEARS. The Company will make equal
payments for any selected number of years (not greater than thirty).
Payments may be made annually, semi-annually, quarterly or monthly.
Option B: LIFETIME MONTHLY PAYMENTS. Payments are based on the payee's Age on
the date the first payment will be made. One of three variations may
be chosen. Depending upon this choice, payments will end:
(a) upon the death of the payee, with no further payments due
(Life Annuity), or
(b) upon the death of the payee, but not before the sum of the
payments made first equals or exceeds the amount applied
under this option (Life Annuity with Installment Refund),
(c) upon the death of the payee, but not before a selected period
(5, 10 or 20 years) has elapsed (Life Annuity with Period
Certain).
Option C: INTEREST PAYMENTS. The Company will pay interest at a rate determined
by the Company each year but which will not be less than 3 1/2%.
Payments may be made annually, semi-annually, quarterly or monthly.
Payments will end when the amount left with the Company has been
withdrawn. However, payments will not continue after the death of the
payee. Any unpaid balance plus accrued interest will be paid in a
lump sum.
Option D: PAYMENTS FOR A SPECIFIED AMOUNT. Payments will be made until the
unpaid balance is exhausted. Interest will be credited to the unpaid
balance. The rate of interest will be determined by the Company each
year but will not be less than 3 1/2%. Payments may be made annually,
semi-annually, quarterly or monthly. The payment level selected must
provide for the payment each year of at least 8% of the amount
applied.
Option E: LIFETIME MONTHLY PAYMENTS FOR TWO PAYEES. One of three variations may
be chosen. After the death of one payee, payments will continue to
the survivor:
(a) in the same amount as the original amount;
(b) in an amount equal to 2/3 of the original amount; or
(c) in an amount equal to 1/2 of the original amount.
Payments are based on the payees' ages on the date the first payment
is due. Payments will end upon the death of the surviving payee.
A-2
<PAGE>
SELECTION OF PAYMENT OPTIONS -- The amount applied under any one option for any
one payee must be at least $5,000. The periodic payment for any one payee must
be at least $50. Subject to your and/or the Beneficiary's provision, any option
selection may be changed before the Death Proceeds become payable. If you make
no selection, the Beneficiary may select an option when the Death Proceeds
become payable.
If the amount of monthly income payments under Option B, choice (c) for the
attained Age of the payee are the same for different periods certain, the
Company will deem an election to have been made for the longest period certain
which could have been elected for such Age and amount.
You may give the Beneficiary the right to change from Option C or D to any other
option at any time. If the payee selects Option C or D when this policy becomes
a claim, the right may be reserved to change to any other option. The payee who
elects to change options must be a payee under the option selected.
ADDITIONAL DEPOSITS -- An additional deposit may be made to any proceeds when
they are applied under Option B or E. A charge not to exceed 3% will be made.
The Company may limit the amount of this deposit.
RIGHTS AND LIMITATIONS -- A payee does not have the right to assign any amount
payable under any option. A payee does not have the right to commute any amount
payable under Option B or E. A payee will have the right to commute any amount
payable under Option A only if the right is reserved in the written request
selecting the option. If the right to commute is exercised, the commuted values
will be computed at the interest rates used to calculate the benefits. The
amount left under Option C, and any unpaid balance under Option D, may be
withdrawn by the payee only as set forth in the written request selecting the
option.
A corporation or fiduciary payee may select only option A, C or D. Such
selection will be subject to the consent of the Company.
PAYMENT DATES -- The first payment under any option, except Option C, will be
due on the date this policy matures by death or otherwise, unless another date
is designated. Payments under Option C begin at the end of the first payment
period.
The last payment under any option will be made as stated in the description of
that option. However, should a payee under Option B or E die prior to the due
date of the second monthly payment, the amount applied less the first monthly
payment will be paid in a lump sum or under any option other than Option E. A
lump sum payment will be made to the surviving payee under Option E or the
succeeding payee under Option B.
A-3
<PAGE>
APPENDIX C -- ILLUSTRATIONS OF SUM INSURED, POLICY VALUES
AND ACCUMULATED PREMIUMS
The following tables illustrate the way in which a Policy's Sum Insured and
Policy Value could vary over an extended period of time. They assume that all
premiums are allocated to and remain in the VEL II Account for the entire period
shown and are based on hypothetical gross investment rates of return for the
Underlying Fund (i.e., investment income and capital gains and losses, realized
or unrealized) equivalent to constant gross (after tax) annual rates of 0%, 6%,
and 12%.
The tables illustrate a Policy issued to a male, Age 30, under a standard
Premium Class and qualifying for the non-smoker discount and a Policy issued to
a male, Age 45, under a standard Premium Class and qualifying for the non-smoker
discount. The tables also illustrate the guaranteed cost of insurance rates and
the current cost of insurance rates as presently in effect.
The Policy Values and Death Proceeds would be different from those shown if the
gross annual investment rates of return averaged 0%, 6%, and 12% over a period
of years, but fluctuated above or below such averages for individual policy
years. The values would also be different depending on the allocation of a
Policy's total Policy Value among the Sub-Accounts of the VEL II Account, if the
actual rates of return averaged 0%, 6% or 12%, but the rates of each Underlying
Fund varied above and below such averages.
The amounts shown for the Death Proceeds and Policy Values take into account the
deduction from premium for the tax expense charge, the Monthly Deduction from
Policy Value, and the daily charge against the VEL II Account for mortality and
expense risks and the VEL II Account administrative charge for the first ten
Policy years. In the Current Cost of Insurance tables, the VEL II Account
charges are equivalent to an effective annual rate of 0.80% of the average daily
value of the assets in the VEL II Account in the first ten Policy Years, and
0.65% thereafter. In the Guaranteed Cost of Insurance Charges tables, the VEL II
Account charges are equivalent to an effective annual rate of 1.15% of the
average daily value of the assets in the VEL II Account in the first ten Policy
Years, and 0.90% thereafter.
The amounts shown in the tables also take into account the Underlying Investment
Company advisory fees and operating expenses, which are assumed to be at an
annual rate of 0.85% of the average daily net assets of the Underlying
Investment Company. The actual fees and expenses of each Underlying Investment
Company vary, and in 1995 ranged from an annual rate of 0.36% to an annual rate
of 1.55% of average daily net assets. The fees and expenses associated with your
Policy may be more or less than 0.85% in the aggregate, depending upon how you
make allocations of Policy Value among the Sub-Accounts.
Under its Management Agreement with the Trust, Allmerica Investments has
declared a voluntary expense limitation of 1.50% of average net average assets
for the Select International Equity Fund, 1.20% for the Growth Fund, 1.00% for
the Investment Grade Income Fund, 0.60% for the Money Market Fund, 0.60% for the
Equity Index Fund, 1.00% for the Government Bond Fund, 1.35% for the Select
Capital Appreciation Fund and the Select Aggressive Growth Fund, 1.20% for the
Select Growth Fund, 1.10% for the Select Growth and Income Fund, and 1.25% for
the Small Cap Value Fund. Without the effect of the expense limitation, in 1995
the total operation expenses of the Select Capital Appreciation Fund would have
been 1.42% of average net assets. Fidelity Management has voluntarily agreed to
temporarily limit the total operating expenses (excluding interest, taxes,
brokerage commissions and extraordinary expenses) of the Equity-Income, Growth
and Overseas Portfolios to an annual rate of 1.50%, and of the High Income
Portfolio to an annual rate of 1.00%, and of the Asset Manager Portfolio to an
annual rate of 1.25%, of each Portfolio's average net assets. Delaware
International has agreed voluntarily to waive its management fees and reimburse
the International Equity Series to limit certain expenses to 8/10 of 1% of the
average daily net assets. Except as noted, in 1995 the expenses of the
Underlying Funds did not exceed the expense limitations.
A-4
<PAGE>
Taking into account the mortality and expense risk charge and the VEL II Account
administrative charge and the assumed 0.85% charge for Underlying Investment
Company advisory fees and operating expenses, the gross annual rates of
investment return of 0%, 6% and 12% correspond to net annual rates of -2.00%,
4.00%, 10.00%, respectively, during the first 10 Policy years and -1.75%, 4.25%
and 10.25%, respectively, thereafter.
The hypothetical returns shown in the table do not reflect any charges for
income taxes against the VEL II Account since no charges are currently made.
However, if in the future such charges are made, in order to produce illustrated
death benefits and cash values, the gross annual investment rate of return would
have to exceed 0%, 6% or 12% by a sufficient amount to cover the tax charges.
The second column of the tables show the amount which would accumulate if an
amount equal to the Guideline Annual Premium were invested to earn interest
(after taxes) at 5% compounded annually.
The tables illustrate the Policy Values that would result based upon the
assumptions that no Policy loans have been made, that you have not requested an
increase or decrease in the initial Face Amount, that no partial withdrawals
have been made, and that no transfers above 6 have been made in any Policy year
(so that no transaction or transfer charges have been incurred).
Upon request, the Company will provide a comparable illustration based upon the
proposed Insured's Age, sex, and underwriting classification, and the requested
Face Amount, Sum Insured Option, and riders.
TO CHOOSE THE SUB-ACCOUNTS WHICH WILL BEST MEET YOUR NEEDS AND OBJECTIVES,
CAREFULLY READ THE PROSPECTUSES OF THE TRUST, FIDELITY VIP, FIDELITY VIP II, T.
ROWE PRICE AND DGPF ALONG WITH THIS PROSPECTUS.
A-5
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
VARI-EXCEPTIONAL LIFE POLICY
Male Non-Smoker Age 30
Specified Face Amount = $75,000
Sum Insured Option 2
CURRENT COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL 12%
PREMIUMS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
PAID PLUS --------------------------------- --------------------------------- ---------------------------------
POLICY INTEREST AT SURRENDER POLICY DEATH SURRENDER POLICY DEATH SURRENDER POLICY DEATH
YEAR 5% PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- --------- ----------- ----------- --------- --------- ----------- --------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,470 283 1,178 76,178 359 1,254 76,254 435 1,331 76,331
2 3,013 1,312 2,333 77,333 1,538 2,559 77,559 1,774 2,795 77,795
3 4,634 2,398 3,465 78,465 2,850 3,917 78,917 3,339 4,407 79,407
4 6,336 3,549 4,574 79,574 4,305 5,329 80,329 5,156 6,180 81,180
5 8,123 4,699 5,659 80,659 5,837 6,797 81,797 7,171 8,132 83,132
6 9,999 5,825 6,721 81,721 7,427 8,324 83,324 9,383 10,280 85,280
7 11,969 6,927 7,759 82,759 9,077 9,910 84,910 11,810 12,643 87,643
8 14,037 8,000 8,768 83,768 10,784 11,553 86,553 14,470 15,238 90,238
9 16,209 9,049 9,753 84,753 12,555 13,260 88,260 17,390 18,094 93,094
10 18,490 10,062 10,703 85,703 14,381 15,021 90,021 20,585 21,226 96,226
11 20,884 11,161 11,673 86,673 16,390 16,903 91,903 24,222 24,735 99,735
12 23,398 12,237 12,621 87,621 18,476 18,860 93,860 28,219 28,603 103,603
13 26,038 13,287 13,544 88,544 20,638 20,895 95,895 32,610 32,866 107,866
14 28,810 14,312 14,440 89,440 22,880 23,008 98,008 37,436 37,564 112,564
15 31,720 15,309 15,309 90,309 25,201 25,201 100,201 42,740 42,740 117,740
16 34,777 16,147 16,147 91,147 27,476 27,476 102,476 48,441 48,441 123,441
17 37,985 16,950 16,950 91,950 29,829 29,829 104,829 54,715 54,715 129,715
18 41,355 17,714 17,714 92,714 32,261 32,261 107,261 61,621 61,621 136,621
19 44,892 18,440 18,440 93,440 34,775 34,775 109,775 69,223 69,223 144,223
20 48,607 19,126 19,126 94,126 37,371 37,371 112,371 77,592 77,592 152,592
Age 60 97,665 23,624 23,624 98,624 68,489 68,489 143,489 225,810 225,810 302,586
Age 65 132,771 23,633 23,633 98,633 87,621 87,621 162,621 374,826 374,826 457,288
Age 70 177,576 21,275 21,275 96,275 108,731 108,731 183,731 615,951 615,951 714,503
Age 75 234,759 15,583 15,583 90,583 131,003 131,003 206,003 1,007,907 1,007,907 1,082,907
</TABLE>
(1) Assumes a $1,400 premium is paid at the beginning of each Policy Year.
Values will be different if premiums are paid with a different frequency or
in different amounts.
(2) Assumes that no policy loan has been made. Excessive loans or withdrawals
may cause this Policy to lapse because of insufficient Policy Value.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY A POLICYOWNER,
AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS. THE VALUE
OF UNITS, CASH VALUE, AND DEATH BENEFIT FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF INVESTMENT RETURN AVERAGES 0%, 6%, AND 12%
OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE AND BELOW THOSE AVERAGES FOR
INDIVIDUAL POLICY YEARS, OR IF ANY PREMIUMS WERE ALLOCATED OR CASH VALUE
TRANSFERRED TO THE FIXED ACCOUNT. NO REPRESENTATIONS CAN BE MADE THAT THESE
HYPOTHETICAL INVESTMENT RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME.
A-6
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
VARI-EXCEPTIONAL LIFE POLICY
Male Non-Smoker Age 30
Specified Face Amount = $75,000
Sum Insured Option 2
GUARANTEED COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL 12%
PREMIUMS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
PAID PLUS ----------------------------------- --------------------------------- ---------------------------------
POLICY INTEREST AT SURRENDER POLICY DEATH SURRENDER POLICY DEATH SURRENDER POLICY DEATH
YEAR 5% PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- --------- ----------- ----------- --------- ----------- ----------- --------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,470 262 1,158 76,158 338 1,233 76,233 414 1,309 76,309
2 3,013 1,269 2,290 77,290 1,492 2,514 77,514 1,725 2,747 77,747
3 4,634 2,330 3,398 78,398 2,776 3,843 78,843 3,258 4,326 79,326
4 6,336 3,455 4,479 79,479 4,197 5,222 80,222 5,034 6,058 81,058
5 8,123 4,574 5,535 80,535 5,690 6,651 81,651 6,999 7,960 82,960
6 9,999 5,667 6,563 81,563 7,234 8,131 83,131 9,149 10,045 85,045
7 11,969 6,733 7,565 82,565 8,832 9,664 84,664 11,500 12,333 87,333
8 14,037 7,770 8,539 83,539 10,482 11,250 86,250 14,072 14,840 89,840
9 16,209 8,780 9,484 84,484 12,186 12,891 87,891 16,884 17,589 92,589
10 18,490 9,760 10,400 85,400 13,946 14,586 89,586 19,961 20,601 95,601
11 20,884 10,803 11,316 86,316 15,865 16,377 91,377 23,446 23,958 98,958
12 23,398 11,818 12,202 87,202 17,846 18,230 93,230 27,260 27,644 102,644
13 26,038 12,803 13,059 88,059 19,892 20,149 95,149 31,438 31,694 106,694
14 28,810 13,758 13,886 88,886 22,004 22,132 97,132 36,014 36,142 111,142
15 31,720 14,682 14,682 89,682 24,184 24,184 99,184 41,030 41,030 116,030
16 34,777 15,446 15,446 90,446 26,304 26,304 101,304 46,398 46,398 121,398
17 37,985 16,177 16,177 91,177 28,493 28,493 103,493 52,296 52,296 127,296
18 41,355 16,873 16,873 91,873 30,752 30,752 105,752 58,775 58,775 133,775
19 44,892 17,533 17,533 92,533 33,084 33,084 108,084 65,893 65,893 140,893
20 48,607 18,156 18,156 93,156 35,488 35,488 110,488 73,713 73,713 148,713
Age 60 97,665 21,524 21,524 96,524 63,150 63,150 138,150 209,388 209,388 284,388
Age 65 132,771 20,153 20,153 95,153 78,566 78,566 153,566 342,324 342,324 417,635
Age 70 177,576 15,057 15,057 90,057 93,126 93,126 168,126 553,120 553,120 641,619
Age 75 234,759 3,935 3,935 78,935 103,642 103,642 178,642 887,453 887,453 962,453
</TABLE>
(1) Assumes a $1,400 premium is paid at the beginning of each Policy Year.
Values will be different if premiums are paid with a different frequency or
in different amounts.
(2) Assumes that no policy loan has been made. Excessive loans or withdrawals
may cause this Policy to lapse because of insufficient Policy Value.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY A POLICYOWNER,
AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS. THE VALUE
OF UNITS, CASH VALUE, AND DEATH BENEFIT FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF INVESTMENT RETURN AVERAGES 0%, 6%, AND 12%
OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE AND BELOW THOSE AVERAGES FOR
INDIVIDUAL POLICY YEARS, OR IF ANY PREMIUMS WERE ALLOCATED OR CASH VALUE
TRANSFERRED TO THE FIXED ACCOUNT. NO REPRESENTATIONS CAN BE MADE THAT THESE
HYPOTHETICAL INVESTMENT RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME.
A-7
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
VARI-EXCEPTIONAL LIFE POLICY
Male Non-Smoker Age 45
Specified Face Amount = $250,000
Sum Insured Option 1
CURRENT COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
PREMIUMS
PAID HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL 12%
PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
INTEREST --------------------------- ---------------------------- -------------------------------
POLICY AT 5% SURRENDER POLICY DEATH SURRENDER POLICY DEATH SURRENDER POLICY DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
------ -------- --------- ------ ------- --------- ------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 4,410 0 3,200 250,000 75 3,418 250,000 293 3,636 250,000
2 9,041 2,566 6,301 250,000 3,203 6,937 250,000 3,866 7,601 250,000
3 13,903 3,384 9,287 250,000 4,644 10,546 250,000 6,011 11,913 250,000
4 19,008 6,494 12,161 250,000 8,584 14,251 250,000 10,945 16,612 250,000
5 24,368 9,609 14,921 250,000 12,740 18,052 250,000 16,424 21,736 250,000
6 29,996 12,594 17,552 250,000 16,981 21,939 250,000 22,359 27,317 250,000
7 35,906 15,464 20,068 250,000 21,325 25,929 250,000 28,815 33,419 250,000
8 42,112 18,216 22,466 250,000 25,775 30,024 250,000 35,848 40,098 250,000
9 48,627 20,851 24,747 250,000 30,335 34,231 250,000 43,524 47,420 250,000
10 55,469 23,355 26,897 250,000 35,000 38,542 250,000 51,904 55,446 250,000
11 62,652 26,251 29,084 250,000 40,312 43,145 250,000 61,627 64,460 250,000
12 70,195 29,021 31,146 250,000 45,758 47,883 250,000 72,264 74,389 250,000
13 78,114 31,648 33,064 250,000 51,331 52,748 250,000 83,911 85,328 250,000
14 86,430 34,120 34,828 250,000 57,030 57,739 250,000 96,687 97,395 250,000
15 95,161 36,422 36,422 250,000 62,852 62,852 250,000 110,720 110,720 250,000
16 104,330 37,861 37,861 250,000 68,112 68,112 250,000 125,477 125,477 250,000
17 113,956 39,125 39,125 250,000 73,515 73,515 250,000 141,838 141,838 250,000
18 124,064 40,195 40,195 250,000 79,058 79,058 250,000 160,007 160,007 250,000
19 134,677 41,027 41,027 250,000 84,722 84,722 250,000 180,212 180,212 250,000
20 145,821 41,647 41,647 250,000 90,544 90,544 250,000 202,749 202,749 250,000
Age 60 95,161 36,422 36,422 250,000 62,852 62,852 250,000 110,720 110,720 250,000
Age 65 142,821 41,647 41,647 250,000 90,544 90,544 250,000 202,749 202,749 250,000
Age 70 210,477 40,696 40,696 250,000 122,197 122,197 250,000 355,914 355,914 412,861
Age 75 292,995 30,366 30,366 250,000 159,685 159,685 250,000 605,316 605,316 647,688
</TABLE>
(1) Assumes a $4,200 premium is paid at the beginning of each Policy Year.
Values will be different if premiums are paid with a different frequency or
in different amounts.
(2) Assumes that no policy loan has been made. Excessive loans or withdrawals
may cause this Policy to lapse because of insufficient Policy Value.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY A POLICYOWNER,
AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS. THE VALUE
OF UNITS, CASH VALUE, AND DEATH BENEFIT FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF INVESTMENT RETURN AVERAGES 0%, 6%, AND 12%
OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE AND BELOW THOSE AVERAGES FOR
INDIVIDUAL POLICY YEARS, OR IF ANY PREMIUMS WERE ALLOCATED OR CASH VALUE
TRANSFERRED TO THE FIXED ACCOUNT. NO REPRESENTATIONS CAN BE MADE THAT THESE
HYPOTHETICAL INVESTMENT RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME.
A-8
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
VARI-EXCEPTIONAL LIFE POLICY
Male Non-Smoker Age 45
Specified Face Amount = $250,000
Sum Insured Option 1
GUARANTEED COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
PREMIUMS
PAID HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL 12%
PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
INTEREST --------------------------- ---------------------------- -------------------------------
POLICY AT 5% SURRENDER POLICY DEATH SURRENDER POLICY DEATH SURRENDER POLICY DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
------ -------- --------- ------ ------- --------- ------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 4,410 0 3,102 250,000 0 3,317 250,000 190 3,533 250,000
2 9,041 2,352 6,087 250,000 2,976 6,711 250,000 3,627 7,362 250,000
3 13,903 3,051 8,953 250,000 4,279 10,182 250,000 5,614 11,516 250,000
4 19,008 6,033 11,700 250,000 8,064 13,731 250,000 10,360 16,027 250,000
5 24,368 9,008 14,321 250,000 12,041 17,353 250,000 15,612 20,924 250,000
6 29,996 11,857 16,815 250,000 16,092 21,051 250,000 21,290 26,248 250,000
7 35,906 14,567 19,171 250,000 20,209 24,813 250,000 27,426 32,030 250,000
8 42,112 17,127 21,377 250,000 24,381 28,631 250,000 34,060 38,310 250,000
9 48,627 19,527 23,423 250,000 28,601 32,497 250,000 41,237 45,133 250,000
10 55,469 21,752 25,293 250,000 32,856 36,398 250,000 49,005 52,546 250,000
11 62,652 24,215 27,049 250,000 37,592 40,425 250,000 57,918 60,751 250,000
12 70,195 26,483 28,608 250,000 42,360 44,484 250,000 67,584 69,709 250,000
13 78,114 28,548 29,965 250,000 47,157 48,573 250,000 78,095 79,512 250,000
14 86,430 30,399 31,107 250,000 51,978 52,686 250,000 89,552 90,260 250,000
15 95,161 32,013 32,013 250,000 56,808 56,808 250,000 102,063 102,063 250,000
16 104,330 32,658 32,658 250,000 60,924 60,924 250,000 115,051 115,051 250,000
17 113,956 33,018 33,018 250,000 65,019 65,019 250,000 129,377 129,377 250,000
18 124,064 33,055 33,055 250,000 69,068 69,068 250,000 145,217 145,217 250,000
19 134,677 32,723 32,723 250,000 73,042 73,042 250,000 162,780 162,780 250,000
20 145,821 31,972 31,972 250,000 76,910 76,910 250,000 182,323 182,323 250,000
Age 60 95,161 32,013 32,013 250,000 56,808 56,808 250,000 102,063 102,063 250,000
Age 65 142,821 31,972 31,972 250,000 76,910 76,910 250,000 182,323 182,323 250,000
Age 70 210,477 20,174 20,174 250,000 93,746 93,746 250,000 316,131 316,131 366,712
Age 75 292,995 0 0 0 101,672 101,672 250,000 529,651 529,651 566,726
</TABLE>
(1) Assumes a $4,200 premium is paid at the beginning of each Policy Year.
Values will be different if premiums are paid with a different frequency or
in different amounts.
(2) Assumes that no policy loan has been made. Excessive loans or withdrawals
may cause this Policy to lapse because of insufficient Policy Value.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY A POLICYOWNER,
AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS. THE VALUE
OF UNITS, CASH VALUE, AND DEATH BENEFIT FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF INVESTMENT RETURN AVERAGES 0%, 6%, AND 12%
OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE AND BELOW THOSE AVERAGES FOR
INDIVIDUAL POLICY YEARS, OR IF ANY PREMIUMS WERE ALLOCATED OR CASH VALUE
TRANSFERRED TO THE FIXED ACCOUNT. NO REPRESENTATIONS CAN BE MADE THAT THESE
HYPOTHETICAL INVESTMENT RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME.
A-9
<PAGE>
APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES
A separate surrender charge is calculated upon issuance of the Policy and upon
each increase in Face Amount. The maximum surrender charge is equal to the sum
of (a) plus (b), where (a) is a deferred administrative charge equal to $8.50
per $1,000 of initial Face Amount (or Face Amount increase) and (b) is a
deferred sales charge of 49% of premiums received up to a maximum number of
Guideline Annual Premiums (GAPs) subject to the deferred sales charge that
varies by issue Age or Age at time of increase as applicable:
<TABLE>
<CAPTION>
APPLICABLE AGE MAXIMUM GAPS APPLICABLE AGE MAXIMUM GAPS
- -------------- ---------------------- -------------- ----------------------
<S> <C> <C> <C>
0-55 1.660714 68 1.290612
56 1.632245 69 1.262143
57 1.603776 70 1.233673
58 1.575306 71 1.205204
59 1.546837 72 1.176735
60 1.518367 73 1.148265
61 1.489898 74 1.119796
62 1.461429 75 1.091327
63 1.432959 76 1.062857
64 1.404490 77 1.034388
65 1.376020 78 1.005918
66 1.347551 79 0.977449
67 1.319082 80 0.948980
</TABLE>
A further limitation is imposed based on the Standard Non-Forfeiture Law of each
state. The maximum surrender charges upon issuance of the Policy and upon each
increase in Face Amount are shown in the table below. During the first two
Policy years following issue or an increase in Face Amount, the actual surrender
charge may be less than the maximum. See "CHARGES AND DEDUCTIONS -- Surrender
Charge."
The maximum surrender charge initially remains level and then grades down
according to the following schedule:
<TABLE>
<CAPTION>
AGES
- ---------
<S> <C>
0-50 The maximum surrender charge remains level for the first 40 Policy months, reduces by 0.5% for the next
80 Policy months, then decreases by 1% per month to zero at the end of 180 Policy months (15 Policy
years).
51 and The maximum surrender charge remains level for 40 Policy months and decreases per month by the
above percentages below:
age 51 -- 0.78% per month for 128 months
age 52 -- 0.86% per month for 116 months
age 53 -- 0.96% per month for 104 months
age 54 -- 1.09% per month for 92 months
age 55 and over -- 1.25% per month for 80 months
</TABLE>
A-10
<PAGE>
The Factors used in calculating the maximum surrender charges vary with the
issue Age, Sex and Premium Class (Smoker) as indicated in the table below.
<TABLE>
<CAPTION>
MAXIMUM SURRENDER CHARGE PER $1,000 FACE AMOUNT
AGE OF
ISSUE OR MALE MALE FEMALE FEMALE
INCREASE NONSMOKER SMOKER NONSMOKER SMOKER
- --------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
0 8.63 7.68
1 8.63 7.70
2 8.78 7.81
3 8.94 7.93
4 9.10 8.05
5 9.27 8.18
6 9.46 8.32
7 9.65 8.47
8 9.86 8.62
9 10.08 8.78
10 10.31 8.95
11 10.55 9.13
12 10.81 9.32
13 11.07 9.51
14 11.34 9.71
15 11.62 9.92
16 11.89 10.14
17 12.16 10.36
18 10.65 12.44 9.73 10.59
19 10.87 12.73 9.93 10.83
20 11.10 13.02 10.15 11.09
21 11.34 13.33 10.37 11.35
22 11.59 13.66 10.60 11.63
23 11.85 14.01 10.85 11.92
24 12.14 14.38 11.10 12.22
25 12.44 14.77 11.37 12.54
26 12.75 15.19 11.66 12.88
27 13.09 15.64 11.95 13.23
28 13.45 16.11 12.26 13.60
29 13.83 16.62 12.59 13.99
30 14.23 17.15 12.93 14.40
31 14.66 17.72 13.29 14.83
32 15.10 18.32 13.67 15.28
33 15.58 18.96 14.07 15.75
34 16.08 19.63 14.49 16.25
35 16.60 20.35 14.93 16.77
36 17.16 21.10 15.39 17.33
37 17.75 21.89 15.88 17.91
38 18.37 22.73 16.39 18.51
39 19.02 23.55 16.93 19.15
40 19.71 24.28 17.50 19.81
41 20.44 25.04 18.09 20.51
42 21.20 25.85 18.71 21.23
43 22.02 26.71 19.36 21.98
44 22.87 27.61 20.04 22.77
45 23.61 28.56 20.76 23.56
46 24.36 29.57 21.52 24.23
</TABLE>
A-11
<PAGE>
<TABLE>
<CAPTION>
MAXIMUM SURRENDER CHARGE PER $1,000 FACE AMOUNT (CONTINUED)
AGE OF
ISSUE OR MALE MALE FEMALE FEMALE
INCREASE NONSMOKER SMOKER NONSMOKER SMOKER
- --------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
47 25.15 30.63 22.33 24.94
48 26.00 31.16 23.14 24.69
49 26.90 32.95 23.83 26.47
50 27.85 34.21 24.57 27.31
51 28.87 35.56 25.35 28.18
52 29.96 36.99 26.17 29.11
53 31.12 38.25 27.05 30.09
54 32.56 38.25 27.95 31.12
55 33.67 38.25 28.97 32.21
56 34.62 38.25 29.65 32.94
57 35.61 38.25 30.36 33.70
58 36.65 38.25 31.11 34.49
59 37.73 38.25 31.90 35.33
60 38.25 38.25 32.74 36.23
61 38.25 38.25 33.63 37.18
62 38.25 38.25 34.57 38.18
63 38.25 38.25 35.56 38.25
64 38.25 38.25 36.60 38.25
65 38.25 38.25 37.68 38.25
66 38.25 38.25 38.25 38.25
67 38.25 38.25 38.25 38.25
68 38.25 38.25 38.25 38.25
69 38.25 38.25 38.25 38.25
70 38.25 38.25 38.25 38.25
71 38.25 38.25 38.25 38.25
72 38.25 38.25 38.25 38.25
73 38.25 38.25 38.25 38.25
74 38.25 38.25 38.25 38.25
75 38.25 38.25 38.25 38.25
76 38.25 38.25 38.25 38.25
77 38.25 38.25 38.25 38.25
78 38.25 38.25 38.25 38.25
79 38.25 38.25 38.25 38.25
80 38.25 38.25 38.25 38.25
</TABLE>
EXAMPLES
For the purposes of these examples, assume that a male, Age 35, non-smoker
purchases a $100,000 Policy. In this example the Guideline Annual Premium
("GAP") equals $1,118.22. His maximum surrender charge is calculated as follows:
<TABLE>
<S> <C> <C> <C>
(1) Deferred Administrative Charge $ 850.00
($8.50/$1,000 of Face Amount)
(2) Deferred Sales Charge $ 909.95
(49% X 1.660714 GAPs)
---------
TOTAL $1,759.95
Maximum Surrender Charge per Table on page 84 (16.60 X 100) $1,660.00
</TABLE>
A-12
<PAGE>
During the first two Policy years after the Date of Issue, the actual surrender
charge is the smaller of the maximum surrender charge and the following sum:
<TABLE>
<S> <C> <C> <C>
(1) Deferred Administrative Charge $ 850.00
($8.50/$1,000 of Face Amount)
(2) Deferred Sales Charge Varies
(not to exceed 29% of Premiums received, up to one GAP,
plus 9% of premiums received in excess of one GAP, but
less than the maximum number of GAPs subject to the
deferred sales charge)
---------
Sum of (a) and (b)
</TABLE>
The maximum surrender charge is $1,660.00. All premiums are associated with the
initial face amount unless the face amount is increased.
EXAMPLE 1:
Assume the Policyowner surrenders the Policy in the 10th policy month, having
paid total premiums of $900. The actual surrender charge would be $1,111.
EXAMPLE 2:
Assume the Policyowner surrenders the Policy in the 120th month. After the 40th
policy month, the maximum surrender charge decreases by 0.5% per month ($8.30
per month in this example). In this example, the maximum surrender charge would
be $996.00.
A-13
<PAGE>
Part II
UNDERTAKING TO FILE REPORTS
---------------------------
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.
RULE 484 UNDERTAKING
--------------------
To the fullest extent permissible under Massachusetts General Laws, no director
shall be personally liable to the Company or any policy holder for monetary
damages for any breach of fiduciary duty as a director, notwithstanding any
provisions 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
policy holders;
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.
RULE 6E-3(T) REPRESENTATIONS, DESCRIPTIONS AND UNDERTAKINGS
-----------------------------------------------------------
Registrant makes the following representations pursuant to the requirements of
Rule 6e-3(T) under the Investment Company Act of 1940:
A. Risk Charge
Pursuant to Rule 6e-3(T)(b)(13)(iii)(F)(1), Registrant represents that Rule 6e-
3(T)(b)(13)(iii)(F) has been relied upon in deducting charges for mortality
expense and risks assumed by First Allmerica Financial Life Insurance Company
(the "Company").
Pursuant to Rule 6e-3(T)(b)(13)(iii)(F)(2), Registrant represents that the
mortality and expense risk charge is within the range of industry practice for
comparable flexible premium variable life insurance contracts. The methodology
used to support this representation is based upon an analysis of the mortality
and expense risk charges adopted under other flexible premium variable life
insurance contracts. Registrant undertakes to keep and make available to the
Commission on request the documents used to support the foregoing
representation.
<PAGE>
B. Distribution Costs
Pursuant to Rule 6e-3(T)(b)(13)(iii)(F)(4)(ii)(A), Registrant represents that
the Company has concluded that there is a reasonable likelihood that the
distribution financing arrangement of the Registrant will benefit the Registrant
and contract holders and will keep and make available to the Commission on
request a memorandum setting forth the basis for this representation. Pursuant
to Section 6e-3(T)(b)(13)(iii)(F)(4)(ii)(B)(2), Registrant also represents that
it will invest only in management investment companies which have undertaken to
have a board of directors, a majority of whom are not interested persons of the
company, formulate and approve any plan under Rule 12b-1 under the Investment
Company Act of 1940 to finance distribution expenses.
UNDERTAKINGS CONCERNING MORTALITY AND EXPENSE RISK CHARGE
---------------------------------------------------------
The flexible premium variable life policies offered by this registration
statement provide for a mortality and expense risk charge of 0.65%, on an annual
basis, of the daily net asset value of each Sub-Account of the VEL II Account.
The Company acknowledges that any mortality and expense risk charge above 0.90%
is currently considered above the range of industry practice. If the Company
proposes to increase the charges above the range of industry practice, the
Company hereby undertakes to file an exemption request with the Securities and
Exchange Commission ("Commission") in which it would demonstrate that the
proposed charge is reasonable in relation to the risks assumed under the Policy.
This undertaking is given subject to the applicability of future federal
legislation or Commission rules or regulation which might permit an increase in
the mortality and expense risk charge beyond the range of industry practice,
without submitting an exemption application and/or making the demonstration
described above. In such case, in lieu of the undertaking described above, the
Company hereby undertakes to comply with the provisions of such legislation,
rules, or regulations in implementing any increase in the mortality and expense
risk charge.
CONTENTS OF THE REGISTRATION STATEMENT
--------------------------------------
This registration statement comprises the following papers and documents:
The facing sheet.
Cross-reference to items required by Form N-8B-2.
The prospectus consisting of ____ pages.
The undertaking to file reports.
The undertaking pursuant to Rule 484 under the Securities Act of 1933.
Representatives, descriptions and undertaking pursuant to Rule 6e-
3(T)(b)(13)(iii)(F) under the Investment Company Act of 1940 (the "1940
Act").
The signatures.
<PAGE>
Written consents of the following persons:
1. Price Waterhouse
2. Actuarial Consent
3. Opinion of Counsel
The following exhibits:
1. Exhibit 1
(Exhibits required by paragraph A of the instructions to Form N-8B-2)
(1) Certified copy of Resolutions of the Board of
Directors of the Company of August 20, 1991
authorizing the VEL II Account was previously
filed on November 1, 1993 and is herein
incorporated by reference.
(2) Not Applicable.
(3) (a) Form of Underwriting and Administrative Services Agreement
between the Company and Allmerica Investments, Inc. was
previously filed on November 1, 1993 and is herein
incorporated by reference.
(b) Sales Agreement between Allmerica
Investments, Inc. and G.R. Phelps & Co.,
Inc. was previously filed on February
27, 1995 and is herein incorporated by
reference.
(4) Not Applicable.
(5) Forms of Policy and Policy riders were previously
filed on November 1, 1993 and is herein
incorporated by reference.
(6) (a) Company's Restated Articles or Organization and
Bylaws were previously filed in Post-effective
Amendment No. 3 and are herein incorporated by
reference.
(b) Revised Bylaws were previously filed on April 30,
1996 in Post-Effective Amendment No. 4 and are
incorporated by reference herein.
(7) Not Applicable.
(8) (a) Form of Participation Agreement with
Allmerica Investment Trust was
previously filed by the Company on May
11, 1992 in Registration Statement No.
33-47858, and is incorporated herein by
reference.
(b) Form of Participation Agreement with
Variable Insurance Products Fund was
previously filed on June 3, 1987 in
Registration Statement No. 33-14672 and
is incorporated herein by reference.
(c) Form of Participation Agreement with Delaware Group Premium
Fund, Inc. was previously filed on June 3, 1987 in
Registration Statement No. 33-14672 and is incorporated
herein by reference.
(d) Form of Participation Agreement with T. Rowe Price
International Series, Inc. was previously filed on May 1,
1995 and is incorporated herein by reference.
(e) Fidelity Services Agreement was previously filed in
Post-Effective Amendment No. 4 and is incorporated by
reference herein.
(9) Not Applicable.
(10) Form of Application was previously filed on
November 1, 1993 and is herein incorporated by
reference.
<PAGE>
2. Form of Policy and Policy riders are included in Exhibit 1 above.
3. Opinion of Counsel is filed herewith.
4. Not Applicable.
5. Not Applicable.
6. Actuarial Consent is filed herewith.
7. Procedures Memorandum pursuant to Rule 6e-3(T)(b)(12)(iii)
under the 1940 Act which includes conversion procedures
pursuant to Rule 6e-3(T)(b)(13)(v)(B) was previously filed
on November 1, 1993 and is incorporated herein by reference.
8. Consent of Independent Accountants is filed herewith.
9. AUV Calculation Services Agreement with The Shareholder Services Group
dated March 31, 1995 was previously filed on May 1, 1995 and is
incorporated herein by reference.
10. None
15. None
27. Financial Data Schedules are filed herewith.
<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
15th day of August, 1996.
First Allmerica Financial Life
Insurance Company
VEL II Account
By: /s/ John F. O'Brien
-----------------------------------
John F. O'Brien, President
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.
SIGNATURES 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/ Kruno Huitzingh Director, Vice President and
- ---------------------- Chief Information Officer August 15, 1996
Kruno Huitzingh
/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/ James R. McAuliffe Director
- ----------------------
James R. McAuliffe
/s/ Richard Reilly Director and Vice President
- ----------------------
Richard Reilly
/s/ Larry C. Renfro Director and Vice President
- ----------------------
Larry C. Renfro
/s/ Theodore J. Rupley Director
- ----------------------
Theodore J. Rupley
/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 TABLE
-------------
Exhibit 3 Opinion of Counsel
Exhibit 6 Actuarial Consent
Exhibit 8 Consent of Independent Accountants
Exhibit 27 Financial Data Schedules
<PAGE>
August 15, 1996
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 the VEL II Account on Form S-6 under
the Securities Act of 1933 with respect to the Company's individual flexible
premium variable life insurance policies.
I am of the following opinion:
1. VEL II Account 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 the VEL II Account equal to the reserves in other policy
liabilities of the Policies which are supported by the VEL II Account are
not chargeable with liabilities arising out of any other business the
Company may conduct.
3. The individual flexible premium variable life insurance policies, 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 of the VEL II Account on Form
S-6 filed under the Securities Act of 1933.
Very truly yours,
/s/ Sheila B. St. Hilaire
Sheila B. St. Hilaire
Counsel
<PAGE>
August 15, 1996
First Allmerica Financial Life Insurance Company
440 Lincoln Street
Worcester MA 01653
Gentlemen:
This opinion is furnished in connection with the filing by First Allmerica
Financial Life Insurance Company of an amendment to the Registration Statement
on Form S-6 of its flexible premium variable life insurance policies
("Policies") allocated to the VEL II Account under the Securities Act of 1933.
The prospectus included in the amendment to the Registration Statement describes
the Policies. I am familiar with and have provided actuarial advice concerning
the preparation of the amendment to the Registration Statement, including
exhibits.
In my professional opinion, the illustration of death benefits and cash values
included in Appendix C of the prospectus, based on the assumptions stated in the
illustrations, are consistent with the provisions of the Policy. The rate
structure of the Policies has not been designed so as to make the relationship
between premiums and benefits, as shown in the illustrations, appear more
favorable to a prospective purchaser of a Policy for a person age 30 or a person
age 45 than to prospective purchasers of Policies for people at other ages or
underwriting classes.
I hereby consent to the use of this opinion as an exhibit to the amendment to
the Registration Statement.
Sincerely,
/s/William H. Mawdsley
William H. Mawdsley, FSA, MAAA
Vice President and Actuary
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Post-Effective Amendment No. 5 to the Registration Statement on Form S-6 of
our report dated February 5, 1996, relating to the consolidated financial
statements of First Allmerica Financial Life Insurance Company and our report
dated February 23, 1996, relating to the financial statements of the VEL II
Account of First Allmerica Financial Life Insurance Company, both of which
appear in such Prospectus. We also consent to the reference to us under the
heading "Independent Accountants" in such Prospectus.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Boston, Massachusetts
August 15, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 101
<NAME> ALVL2001
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 189310
<INVESTMENTS-AT-VALUE> 199122
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 199122
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 274
<TOTAL-LIABILITIES> 274
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 149166
<SHARES-COMMON-PRIOR> 36441
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 9812
<NET-ASSETS> 198848
<DIVIDEND-INCOME> 17788
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 1419
<NET-INVESTMENT-INCOME> 16369
<REALIZED-GAINS-CURRENT> 4355
<APPREC-INCREASE-CURRENT> 11702
<NET-CHANGE-FROM-OPS> 32426
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 161852
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 123391
<PER-SHARE-NAV-BEGIN> 1.015
<PER-SHARE-NII> .161
<PER-SHARE-GAIN-APPREC> .157
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.333
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 102
<NAME> ALVL2002
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 122449
<INVESTMENTS-AT-VALUE> 129784
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 129784
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 161
<TOTAL-LIABILITIES> 161
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 111480
<SHARES-COMMON-PRIOR> 67437
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 7335
<NET-ASSETS> 129623
<DIVIDEND-INCOME> 8047
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 1296
<NET-INVESTMENT-INCOME> 6751
<REALIZED-GAINS-CURRENT> 1691
<APPREC-INCREASE-CURRENT> 8501
<NET-CHANGE-FROM-OPS> 16943
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 62328
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 112696
<PER-SHARE-NAV-BEGIN> .998
<PER-SHARE-NII> .066
<PER-SHARE-GAIN-APPREC> .099
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.163
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 103
<NAME> ALVL2003
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 366514
<INVESTMENTS-AT-VALUE> 366514
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 366514
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 955
<TOTAL-LIABILITIES> 955
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 342253
<SHARES-COMMON-PRIOR> 311160
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 365559
<DIVIDEND-INCOME> 19962
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 4004
<NET-INVESTMENT-INCOME> 15958
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 15958
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 47951
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 348174
<PER-SHARE-NAV-BEGIN> 1.021
<PER-SHARE-NII> .047
<PER-SHARE-GAIN-APPREC> .000
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.068
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 104
<NAME> ALVL2004
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 97254
<INVESTMENTS-AT-VALUE> 107571
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 107571
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 58
<TOTAL-LIABILITIES> 58
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 75887
<SHARES-COMMON-PRIOR> 25217
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 10317
<NET-ASSETS> 107513
<DIVIDEND-INCOME> 4030
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 627
<NET-INVESTMENT-INCOME> 3403
<REALIZED-GAINS-CURRENT> 100
<APPREC-INCREASE-CURRENT> 10948
<NET-CHANGE-FROM-OPS> 14451
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 80983
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 54522
<PER-SHARE-NAV-BEGIN> 1.052
<PER-SHARE-NII> .086
<PER-SHARE-GAIN-APPREC> .279
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.417
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 105
<NAME> ALVL2005
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 176817
<INVESTMENTS-AT-VALUE> 185199
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 185199
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 147
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 162785
<SHARES-COMMON-STOCK> 150890
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 8382
<NET-ASSETS> 185052
<DIVIDEND-INCOME> 11211
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 2144
<NET-INVESTMENT-INCOME> 9067
<REALIZED-GAINS-CURRENT> 1190
<APPREC-INCREASE-CURRENT> 10688
<NET-CHANGE-FROM-OPS> 20945
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 31692
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 186435
<PER-SHARE-NAV-BEGIN> 1.017
<PER-SHARE-NII> .052
<PER-SHARE-GAIN-APPREC> .068
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.137
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 106
<NAME> ALVL2006
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 356111
<INVESTMENTS-AT-VALUE> 429068
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 429068
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 359
<TOTAL-LIABILITIES> 359
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 347682
<SHARES-COMMON-PRIOR> 145112
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 72957
<NET-ASSETS> 428709
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 3161
<NET-INVESTMENT-INCOME> (3161)
<REALIZED-GAINS-CURRENT> 1962
<APPREC-INCREASE-CURRENT> 72394
<NET-CHANGE-FROM-OPS> 71195
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 291920
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 274870
<PER-SHARE-NAV-BEGIN> .943
<PER-SHARE-NII> (.013)
<PER-SHARE-GAIN-APPREC> .303
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.233
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 107
<NAME> ALVL2007
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 140779
<INVESTMENTS-AT-VALUE> 154620
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 154620
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 164
<TOTAL-LIABILITIES> 164
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 125803
<SHARES-COMMON-PRIOR> 38177
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 13841
<NET-ASSETS> 154456
<DIVIDEND-INCOME> 23
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 1118
<NET-INVESTMENT-INCOME> (1095)
<REALIZED-GAINS-CURRENT> 1381
<APPREC-INCREASE-CURRENT> 13793
<NET-CHANGE-FROM-OPS> 14079
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 38050
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 97217
<PER-SHARE-NAV-BEGIN> .997
<PER-SHARE-NII> (.018)
<PER-SHARE-GAIN-APPREC> .249
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.228
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 108
<NAME> ALVL2008
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 142889
<INVESTMENTS-AT-VALUE> 157995
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 157995
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 142
<TOTAL-LIABILITIES> 142
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 118937
<SHARES-COMMON-PRIOR> 513977
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 15106
<NET-ASSETS> 157853
<DIVIDEND-INCOME> 7647
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 1120
<NET-INVESTMENT-INCOME> 6527
<REALIZED-GAINS-CURRENT> 390
<APPREC-INCREASE-CURRENT> 17723
<NET-CHANGE-FROM-OPS> 24640
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 104920
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 97391
<PER-SHARE-NAV-BEGIN> 1.030
<PER-SHARE-NII> .079
<PER-SHARE-GAIN-APPREC> .218
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.327
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 109
<NAME> ALVL2009
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 173474
<INVESTMENTS-AT-VALUE> 185815
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 185815
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 290
<TOTAL-LIABILITIES> 290
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 169148
<SHARES-COMMON-PRIOR> 89952
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 12341
<NET-ASSETS> 185525
<DIVIDEND-INCOME> 6195
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 1618
<NET-INVESTMENT-INCOME> 4577
<REALIZED-GAINS-CURRENT> 2486
<APPREC-INCREASE-CURRENT> 14137
<NET-CHANGE-FROM-OPS> 21200
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 100679
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 140696
<PER-SHARE-NAV-BEGIN> .943
<PER-SHARE-NII> .033
<PER-SHARE-GAIN-APPREC> .121
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.097
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 110
<NAME> ALVL2011
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 146669
<INVESTMENTS-AT-VALUE> 155947
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 155947
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 102
<TOTAL-LIABILITIES> 102
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 137567
<SHARES-COMMON-PRIOR> 14904
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 9278
<NET-ASSETS> 155845
<DIVIDEND-INCOME> 2081
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 894
<NET-INVESTMENT-INCOME> 1187
<REALIZED-GAINS-CURRENT> 441
<APPREC-INCREASE-CURRENT> 9816
<NET-CHANGE-FROM-OPS> 11444
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 141570
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 77739
<PER-SHARE-NAV-BEGIN> .958
<PER-SHARE-NII> .018
<PER-SHARE-GAIN-APPREC> .057
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.133
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 111
<NAME> ALVL2102
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 212855
<INVESTMENTS-AT-VALUE> 232892
<RECEIVABLES> 251
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 233143
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 198246
<SHARES-COMMON-PRIOR> 95576
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 20037
<NET-ASSETS> 233143
<DIVIDEND-INCOME> 8429
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 1961
<NET-INVESTMENT-INCOME> 6468
<REALIZED-GAINS-CURRENT> 2195
<APPREC-INCREASE-CURRENT> 20200
<NET-CHANGE-FROM-OPS> 28863
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 138886
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 170522
<PER-SHARE-NAV-BEGIN> .986
<PER-SHARE-NII> .043
<PER-SHARE-GAIN-APPREC> .147
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.176
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 112
<NAME> ALVL2103
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 574555
<INVESTMENTS-AT-VALUE> 676409
<RECEIVABLES> 361
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 676770
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 469354
<SHARES-COMMON-PRIOR> 179208
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 101854
<NET-ASSETS> 676770
<DIVIDEND-INCOME> 21950
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 4859
<NET-INVESTMENT-INCOME> 17091
<REALIZED-GAINS-CURRENT> 1925
<APPREC-INCREASE-CURRENT> 100571
<NET-CHANGE-FROM-OPS> 119587
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 483329
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 422522
<PER-SHARE-NAV-BEGIN> 1.079
<PER-SHARE-NII> .052
<PER-SHARE-GAIN-APPREC> .311
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.442
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 113
<NAME> ALVL2104
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 559790
<INVESTMENTS-AT-VALUE> 643055
<RECEIVABLES> 553
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 643608
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 480189
<SHARES-COMMON-PRIOR> 215619
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 83265
<NET-ASSETS> 643608
<DIVIDEND-INCOME> 1164
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 4698
<NET-INVESTMENT-INCOME> (3534)
<REALIZED-GAINS-CURRENT> 25500
<APPREC-INCREASE-CURRENT> 74665
<NET-CHANGE-FROM-OPS> 96631
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 427698
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 408522
<PER-SHARE-NAV-BEGIN> 1.001
<PER-SHARE-NII> (.012)
<PER-SHARE-GAIN-APPREC> .351
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.340
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 114
<NAME> ALVL2105
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 397389
<INVESTMENTS-AT-VALUE> 417483
<RECEIVABLES> 81
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 417564
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 389710
<SHARES-COMMON-PRIOR> 214617
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 20094
<NET-ASSETS> 417564
<DIVIDEND-INCOME> 1981
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 3676
<NET-INVESTMENT-INCOME> (1695)
<REALIZED-GAINS-CURRENT> 6939
<APPREC-INCREASE-CURRENT> 25493
<NET-CHANGE-FROM-OPS> 30737
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 205438
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 319652
<PER-SHARE-NAV-BEGIN> .988
<PER-SHARE-NII> (.005)
<PER-SHARE-GAIN-APPREC> .088
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.071
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 115
<NAME> ALVL2106
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 281754
<INVESTMENTS-AT-VALUE> 312946
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 312946
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 328
<TOTAL-LIABILITIES> 328
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 273691
<SHARES-COMMON-PRIOR> 190971
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 31192
<NET-ASSETS> 312618
<DIVIDEND-INCOME> 4679
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 2996
<NET-INVESTMENT-INCOME> 1683
<REALIZED-GAINS-CURRENT> 1938
<APPREC-INCREASE-CURRENT> 36035
<NET-CHANGE-FROM-OPS> 39656
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 123991
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 360522
<PER-SHARE-NAV-BEGIN> .988
<PER-SHARE-NII> .007
<PER-SHARE-GAIN-APPREC> .147
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.142
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 116
<NAME> ALVL2207
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 151953
<INVESTMENTS-AT-VALUE> 164192
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 164192
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 237
<TOTAL-LIABILITIES> 237
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 144377
<SHARES-COMMON-PRIOR> 55775
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 12239
<NET-ASSETS> 163955
<DIVIDEND-INCOME> 2054
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 1313
<NET-INVESTMENT-INCOME> 741
<REALIZED-GAINS-CURRENT> 533
<APPREC-INCREASE-CURRENT> 13079
<NET-CHANGE-FROM-OPS> 14353
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 107703
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 114174
<PER-SHARE-NAV-BEGIN> 1.009
<PER-SHARE-NII> .007
<PER-SHARE-GAIN-APPREC> .120
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.136
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 191
<NAME> ALVL2150
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 25102
<INVESTMENTS-AT-VALUE> 26086
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 26086
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 31
<TOTAL-LIABILITIES> 31
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 24722
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 984
<NET-ASSETS> 26055
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 77
<NET-INVESTMENT-INCOME> (77)
<REALIZED-GAINS-CURRENT> 7
<APPREC-INCREASE-CURRENT> 984
<NET-CHANGE-FROM-OPS> 914
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 26055
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 6696
<PER-SHARE-NAV-BEGIN> 1.000
<PER-SHARE-NII> (.005)
<PER-SHARE-GAIN-APPREC> .059
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.054
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
