<PAGE>
File No. 33-71054
811-8814
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1933
Post-Effective Amendment No. 7
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 13
SEPARATE ACCOUNT VA-K 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)
Richard J. Baker, Vice President and Secretary
First Allmerica Financial Life Insurance and Annuity Company
440 Lincoln Street
Worcester MA 01653
(Name and Address of Agent for Service of Process)
It is proposed that this filing will become effective:
immediately upon filing pursuant to Paragraph (b)
---
X on (July 8, 1996) pursuant to Paragraph (b)
---
60 days after filing pursuant to Paragraph (a) (1)
---
on (date) pursuant to Paragraph (a) (1)
---
on (date) pursuant to Paragraph (a) (2) of Rule 485
---
VARIABLE ANNUITY POLICIES
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>
CROSS REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS OF
ITEMS CALLED FOR BY FORM N-4
FORM N-4 ITEM NO. CAPTION IN PROSPECTUS
- ----------------- ---------------------
1. . . . . . . . . . . . . . Cover Page
2. . . . . . . . . . . . . . "Special Terms"
3. . . . . . . . . . . . . . "Summary"; "Annual and Transaction Expenses"
4. . . . . . . . . . . . . . "Condensed Financial Information"
5. . . . . . . . . . . . . . Prospectus A: Description of the Company, the
Separate Account, and Delaware Group Premium
Fund, Inc. Prospectus B: Description of the
Company, the Variable Account, and Delaware
Group Premium Fund, Inc.
6. . . . . . . . . . . . . . "Charges and Deductions:
7. . . . . . . . . . . . . . Prospectus A: "The Variable Annuity Policies"
Prospectus B: "The Variable Annuity Contracts"
8. . . . . . . . . . . . . . Prospectus A: "The Variable Annuity Policies"
Prospectus B: "The Variable Annuity Contracts"
9. . . . . . . . . . . . . . "Death Benefit"
10 . . . . . . . . . . . . . Prospectus A: "Purchase Payments"; "Computation
of Policy Values and Annuity Payments"
Prospectus B: "Purchase Payments"; "Computation
of Contract Values and Annuity Benefit Payments"
11 . . . . . . . . . . . . . "Surrender"; "Partial Redemption"
12 . . . . . . . . . . . . . "Federal Tax Considerations"
13 . . . . . . . . . . . . . "Legal Matters"
14 . . . . . . . . . . . . . "Table of Contents of the Statement of
Additional Information"
FORM N-4 ITEM NO. CAPTION IN STATEMENT OF ADDITIONAL INFORMATION
- ----------------- ----------------------------------------------
15 . . . . . . . . . . . . . "Cover Page"
16 . . . . . . . . . . . . . "Table of Contents"
17 . . . . . . . . . . . . . "General Information and History"
18 . . . . . . . . . . . . . "Services"
19 . . . . . . . . . . . . . "Underwriters"
20 . . . . . . . . . . . . . "Underwriters"
21 . . . . . . . . . . . . . "Performance Information"
22 . . . . . . . . . . . . . "Annuity Payments"
23 . . . . . . . . . . . . . "Financial Statements"
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
GROUP VARIABLE ANNUITY POLICIES FUNDED THROUGH SUBACCOUNTS OF
SEPARATE ACCOUNT VA-K
INVESTING IN SHARES OF DELAWARE GROUP PREMIUM FUND, INC.
This Prospectus describes group variable annuity policies including certificates
issued thereunder (Policy Form A and Policy Form B collectively, the "Policies")
offered by First Allmerica Financial Life Insurance Company, formally known as
State Mutual Life Assurance Company of America ("Company") to individuals and
businesses in connection with retirement plans which may or may not qualify for
special federal income tax treatment. (For information about the tax status when
used with a particular type of plan, see "FEDERAL TAX CONSIDERATIONS.") The
following is a summary of information about these Policies. More detailed
information can be found under the referenced captions in this Prospectus.
This Prospectus generally describes only the variable accumulation and variable
annuity aspects of the Policies, except where fixed values or fixed annuity
payments are specifically mentioned. Certain additional information about the
Policies is contained in a Statement of Additional Information, dated April 30,
1996 as may be amended from time to time, which has been filed with the
Securities and Exchange Commission and is incorporated herein by reference. The
Table of Contents for the Statement of Additional Information is listed on page
3 of this Prospectus. The Statement of Additional Information is available upon
request and without charge. To obtain the Statement of Additional Information,
fill out and return the attached request card or contact Annuity Customer
Services, First Allmerica Financial Life Insurance Company, 440 Lincoln Street,
Worcester, Massachusetts 01653.
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY A CURRENT PROSPECTUS OF
DELAWARE GROUP PREMIUM FUND, INC.
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.
DATED April 30, 1996
Policy Form A and Policy Form B are identical, except as specifically noted.
Currently, Policy Form B may be offered in New York, and Policy Form A may be
offered in other states.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION . . . . . . . . 3
SPECIAL TERMS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
SUMMARY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
ANNUAL AND TRANSACTION EXPENSES. . . . . . . . . . . . . . . . . . . . . . . 7
PERFORMANCE INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . 9
WHAT IS AN ANNUITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
RIGHT TO REVOKE OR SURRENDER . . . . . . . . . . . . . . . . . . . . . . . . 11
DESCRIPTION OF THE COMPANY, THE SEPARATE ACCOUNT AND THE FUND. . . . . . . . 11
VOTING RIGHTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
CHARGES AND DEDUCTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
A. Contingent Deferred Sales Charge . . . . . . . . . . . . . . . . . . 14
B. Premium Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
C. Policy Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
D. Annual Charge Against Separate Account Assets . . . . . . . . . . . . 17
THE VARIABLE ANNUITY POLICIES. . . . . . . . . . . . . . . . . . . . . . . . 18
A. Purchase Payments . . . . . . . . . . . . . . . . . . . . . . . . . . 18
B. Transfer Privilege. . . . . . . . . . . . . . . . . . . . . . . . . . 19
C. Surrender . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
D. Partial Redemption. . . . . . . . . . . . . . . . . . . . . . . . . . 20
E. Death Benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
F. The Spouse of the Policy Owner as Beneficiary . . . . . . . . . . . . 21
G. Assignment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
H. Electing the Form of Annuity and Annuity Date . . . . . . . . . . . . 22
I. Description of Variable Annuity Options . . . . . . . . . . . . . . . 22
J. Norris Decision . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
K. Computation of Policy Values and Annuity Payments . . . . . . . . . . 23
FEDERAL TAX CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . 25
A. Qualified and Non-Qualified Policies . . . . . . . . . . . . . . . . 25
B. Taxation of Policies in General . . . . . . . . . . . . . . . . . . . 25
C. Tax Withholding and Penalties . . . . . . . . . . . . . . . . . . . . 26
D. Provisions Applicable to Qualified Employee Benefit Plans . . . . . . 26
E. Qualified Employee Pension and Profit Sharing Trusts
and Qualified Annuity Plans. . . . . . . . . . . . . . . . . . 27
F. Self-Employed Individuals . . . . . . . . . . . . . . . . . . . . . . 27
G. Individual Retirement Account Plans . . . . . . . . . . . . . . . . . 27
</TABLE>
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<PAGE>
TABLE OF CONTENTS (CONTINUED)
<TABLE>
<CAPTION>
<S> <C>
H. Simplified Employee Pensions. . . . . . . . . . . . . . . . . . . . 28
I. Public School Systems and Certain Tax-Exempt Organizations . . . . 28
J. Texas Optional Retirement Program . . . . . . . . . . . . . . . . . 28
K. Section 457 Plans for State Governments and Tax-Exempt Entities . . 28
L. Non-Individual Owners . . . . . . . . . . . . . . . . . . . . . . . 29
REPORTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
CHANGES IN OPERATIONS OF THE SEPARATE ACCOUNT. . . . . . . . . . . . . . . . 29
LEGAL MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
FURTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
APPENDIX A - MORE INFORMATION ABOUT THE GENERAL ACCOUNT. . . . . . . . . . . 29
APPENDIX B - EXCHANGE OFFER. . . . . . . . . . . . . . . . . . . . . . . . . 30
</TABLE>
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
GENERAL INFORMATION AND HISTORY. . . . . . . . . . . . . . . . . . . . . . . 2
TAXATION OF THE SEPARATE ACCOUNT AND THE COMPANY . . . . . . . . . . . . . . 2
SERVICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
UNDERWRITERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
ANNUITY PAYMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
PERFORMANCE INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . 5
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
</TABLE>
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<PAGE>
SPECIAL TERMS
As used in this Prospectus, the following terms have the indicated meanings:
ACCUMULATED VALUE: the sum of the value of all Accumulation Units in the
Subaccounts and of the value of all accumulations in the General Account of the
Company then credited to the Policy, on any date before the date annuity
payments are to begin.
ACCUMULATION UNIT: a measure of the Policy Owner's interest in a Subaccount
before annuity payments begin.
ANNUITANT: the person designated in the Policy to whom the Annuity is to be
paid.
ANNUITY DATE: the date on which annuity payments begin.
ANNUITY UNIT: a measure of the value of the periodic annuity payments under the
Policy.
FIXED AMOUNT ANNUITY: an Annuity providing for payments which remain fixed in
amount throughout the annuity payment period.
GENERAL ACCOUNT: all the assets of the Company other than those held in a
separate investment account.
POLICY OWNER: the owner of a Policy who may exercise all rights under the
Policy, subject to the consent of any irrevocable beneficiary. After the Annuity
Date, the Annuitant will be the Policy Owner.
SEPARATE ACCOUNT: Separate Account VA-K of the Company. Separate Account VA-K
consists of assets segregated from other assets of the Company. The investment
performance of the assets of the Separate Account is determined separately from
the other assets of the Company. The assets of the Separate Account are not
chargeable with liabilities arising out of any other business which the Company
may conduct.
SUBACCOUNT: a subdivision of Separate Account VA-K. Each Subaccount available
under the Policies invests exclusively in the shares of a corresponding
investment series of Delaware Group Premium Fund, Inc.
SURRENDER VALUE: the Accumulated Value of the Policy minus any Policy fee and
contingent deferred sales charge applicable upon surrender.
UNDERLYING SERIES: the Equity/Income Series, High Yield Series, Capital
Reserves Series, Money Market Series, Growth Series, Multiple Strategy Series,
Value Series, Emerging Growth Series, the Global Bond Fund and International
Equity Series of Delaware Group Premium Fund, Inc.
VALUATION DATE: a day on which the net asset value of the shares of any of the
Underlying Series is determined and Unit values of the Subaccounts 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 was
received) when there is a sufficient degree of trading in an Underlying Series
portfolio securities such that the current net asset value of the Subaccounts
may be materially affected.
VALUATION PERIOD: the interval between two consecutive Valuation Dates.
VARIABLE ANNUITY: an Annuity providing for payments varying in amount in
accordance with the investment experience of certain Underlying Series.
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<PAGE>
SUMMARY
INVESTMENT OPTIONS. The Policies permit net purchase payments to be allocated
among Subaccounts available under the Policies, which are subdivisions of
Separate Account VA-K ("Separate Account"), a separate account of the Company,
and a fixed interest account ("General Account") of the Company (together
"accounts"). The Separate Account is registered as a unit investment trust under
the Investment Company Act of 1940, as amended, (the "1940 Act") but such
registration does not involve the supervision of the management or investment
practices or policies of the Separate Account by the Securities and Exchange
Commission (the "SEC"). For information about the Separate Account and the
Company, see "DESCRIPTION OF THE COMPANY, THE SEPARATE ACCOUNT, AND THE FUND."
For more information about the General Account see APPENDIX A, "MORE INFORMATION
ABOUT THE GENERAL ACCOUNT."
Each Subaccount available under the Policies invests its assets without sales
charge in a corresponding investment series of the Delaware Group Premium Fund,
Inc. (the"Fund"). The Fund is an open-end, diversified series investment
company. The Fund consists of nine different series: the Equity/Income Series,
High Yield Series, Capital Reserves Series, Money Market Series, Growth Series,
Multiple Strategy Series, Value Series, Emerging Growth Series and International
Equity Series ("Underlying Series"). Each Underlying Series operates pursuant to
different investment objectives, discussed below.
INVESTMENT IN THE SUBACCOUNTS. The value of each Subaccount will vary daily
depending on the performance of the investments made by the respective
Underlying Series.
There can be no assurance that the investment objectives of the Underlying
Series can be achieved or that the value of a Policy will equal or exceed the
aggregate amount of the purchase payments made under the Policy. For more
information about the investments of the Underlying Series, see "DESCRIPTION OF
THE COMPANY, THE SEPARATE ACCOUNT, AND THE FUND." The accompanying prospectus
of the Fund describes the investment objectives and risks of each of the
Underlying Series.
Dividends or capital gains distributions received from an Underlying Series are
reinvested in additional shares of that Underlying Series, which are retained as
assets of the Subaccount.
TRANSFERS AMONG ACCOUNTS. Prior to the Annuity Date, the Policies permit amounts
to be transferred among the Subaccounts and between the General Account and the
Subaccounts, subject to certain limitations described under "Transfer
Privilege."
ANNUITY PAYMENTS. The Policy Owner may select variable annuity payments based on
certain Subaccounts, fixed-amount annuity payments, or a combination of
fixed-amount and variable annuity payments. Fixed-amount annuity payments are
guaranteed by the Company.
See "THE VARIABLE ANNUITY POLICIES" for information about annuity payment
options, selecting the Annuity Date, and how annuity payments are calculated.
REVOCATION RIGHTS. You may revoke the Policy at any time between the date of the
application and the date 10 days after receipt of the Policy. For more
information about revocation rights, see "RIGHT TO REVOKE OR SURRENDER."
PAYMENT MINIMUMS AND MAXIMUMS. Under the Policies, purchase payments are not
limited as to frequency and number, but no payments may be submitted within one
month of the Annuity Date. Generally, the initial purchase payment must be at
least $600 and subsequent payments must be at least $50. Under a monthly
automatic payment plan or a payroll deduction plan, each purchase payment must
be at least $50. However, in cases where the contribution on behalf of an
employee under an employer-sponsored retirement plan is less than $600 but more
than $300 annually, the Company may issue a Policy on the employee, if the
plan's average annual contribution per eligible plan participant is at least
$600.
The Company reserves the right to set maximum limits on the aggregate purchase
payments made under the Policy. In addition, the Internal Revenue Code imposes
maximum limits on contributions under qualified annuity plans.
CHARGES AND DEDUCTIONS. For a complete discussion of charges, see "CHARGES AND
DEDUCTIONS."
A. CONTINGENT DEFERRED SALES CHARGE. No sales charge is deducted from purchase
payments at the time the payments are made. However, depending on the length of
time that the payments to which the withdrawal is attributed have remained
credited under the Policy a contingent deferred sales charge of up to 8% may be
assessed for a surrender, partial redemption, or election of any commutable or a
noncommutable period certain option for less than 10 years.
B. ANNUAL POLICY FEE. A Policy Fee equal to $30 will be deducted from the
Accumulated Value under the Policy for administrative expense on the policy
anniversary, or upon full surrender of the Policy during the year, when the
Accumulated Value is $50,000 or less. The Policy Fee is currently waived for
policies issued to a trustee of a 401(k) plan, but the Company reserves the
right to impose the Policy
-5-
<PAGE>
Fee on such policies.
C. PREMIUM TAXES. A deduction for State and local premium taxes, if any, may be
made as described under "Premium Taxes."
D. SEPARATE ACCOUNT ASSET CHARGES. A daily charge, equivalent to 1.25% per
annum, is made on the value of each Subaccount at each Valuation Date. The
charge is retained for the mortality and expense risks the Company assumes. In
addition, to cover administrative expenses, the Company deducts a daily charge
of 0.15% per annum of the value of the average net assets in the Subaccounts
available under the Policies.
E. TRANSFER CHARGE. The Company currently makes no charge for transfers. The
Company guarantees that the first twelve transfers in a Policy year will be free
of charge. For the thirteenth and each subsequent transfer, the Company reserves
the right to assess a charge, guaranteed never to exceed $25, to reimburse the
Company for the costs of processing the transfer.
F. CHARGES OF THE UNDERLYING SERIES. In addition to the charges described
above, certain fees and expenses are deducted from the assets of the Underlying
Series. These charges vary among the Underlying Series, and may range from an
annual rate of 0.80% to an annual rate of 2.00% of average daily net assets.
SURRENDER OR PARTIAL REDEMPTION. At any time before the Annuity Date, the Policy
Owner has the right either to surrender the Policy in full and receive its
current value, minus the Policy Fee and any applicable contingent deferred sales
charge, or to redeem a portion of the Policy's value subject to certain limits
and any applicable contingent deferred sales charge. There may be tax
consequences for surrender or redemptions. For further information, see
"Surrender" and "Partial Redemption," "Contingent Deferred Sales Charge," and
"FEDERAL TAX CONSIDERATIONS."
DEATH BENEFIT. If the Annuitant or Policy Owner should die before the Annuity
Date, a death benefit will be paid to the beneficiary. Upon death of the
Annuitant, the death benefit is equal to the greatest of (a) the Accumulated
Value under the Policy, or (b) the sum of the gross payment(s) made under the
Policy reduced proportionally to reflect all partial redemptions, or (c) the
death benefit that would have been payable on the most recent fifth year Policy
Anniversary, increased for subsequent purchase payments and reduced
proportionally to reflect withdrawals after that date. Upon death of the Policy
Owner, the death benefit is equal to the Accumulated Value of the Policy.
SALES OF POLICIES. The Policies are sold by agents of the Company who are
authorized by applicable law to sell variable annuity policies. These agents are
registered representatives of broker-dealers which are members of the National
Association of Securities Dealers, Inc. See "Sales Expense."
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<PAGE>
ANNUAL AND TRANSACTION EXPENSES
The purpose of the following tables is to assist the Policy Owner in
understanding the various costs and expenses that a Policy Owner will bear
directly or indirectly under the Policies. The tables reflect charges under the
Policies, expenses of the Subaccounts, and expenses of the Underlying Series.
In addition to the charges and expenses described below, in some states premium
taxes may be applicable.
POLICY OWNER TRANSACTION EXPENSES
- ---------------------------------
Contingent Deferred Sales Charge Policy Year after date of Charge
The charge (as a percentage of Purchase Payment
payments, applied to the amount 0-3 7%
surrendered in excess of the 4 6%
amount, if any, which may be 5 5%
surrendered free of charge) will 6 4%
be assessed upon surrender, 7 3%
redemption, or annuitization more than 7 0%
under any commutable period
certain option or a
noncommutable period certain
less than 10 years.
Transfer Charge
The Company currently makes no None
charge for transfers. The
Company guarantees that the
first twelve transfers in a
Policy year will be free of
charge. For the thirteenth and
each subsequent transfer, the
Company reserves the right to
assess a charge, guaranteed
never to exceed $25, to
reimburse the Company for the
costs of processing the
transfer.
ANNUAL POLICY FEE
An annual Policy Fee, equal to $30
$30, is deducted when
Accumulated Value is $50,000 or
less. The Policy Fee is
currently waived for policies
issued to a trustee of a 401(k)
plan, but the Company reserves
the right to impose the Policy
Fee on such policies.
SEPARATE ACCOUNT ANNUAL EXPENSES
(as a percentage of average account
value)
Mortality and Expense Risk Fees 1.25%
Separate Account Administrative Charge 0.15%
-----
Total Annual Expenses 1.40%
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<PAGE>
DELAWARE GROUP PREMIUM FUND, INC.
<TABLE>
<CAPTION>
Equity/ High Capital Money Growth Multiple Value Emerging Int'l. Global
SERIES ANNUAL EXPENSES Income Yield Reserves Market Strategy Growth Equity Bond
- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees 0.60% 0.60% 0.60% 0.50% 0.70% 0.60% 0.59% 0.59% 0.66% 0.75%
Other Series Expenses 0.09% 0.09% 0.11% 0.12% 0.15% 0.09% 0.21% 0.21% 0.14% n/a
Total Series Annual Expenses 0.69% 0.69% 0.71% 0.62% 0.85% 0.69% 0.80% 0.80% 0.80% 0.80%
(After Expense Reimbursement)
</TABLE>
The investment adviser for the Equity/Income, High Yield, Capital Reserves,
Money Market, Growth, Multiple Strategy, Value and Emerging Growth Series is
Delaware Management Company, Inc. The Investment Adviser for the
International Equity Series is Delaware International Advisers Ltd. The
investment advisers from the Series of the Fund have agreed voluntarily to
waive their management fees and reimburse each Series to limit certain
expenses to 8/10 of 1% of the average daily net assets. This waiver will be
in effect through June 30, 1996. The ratio of expenses to average daily net
assets, shown in the table above for the nine Series as 0.80%, reflects the
investment adviser waiver and, in the case of the Growth Series,
reimbursement by its investment adviser for other expenses of that Series.
For the fiscal year ended December 31, 1995, before waiver and/or
reimbursement by the investment adviser, total Series expenses as a
percentage of average daily net assets were 0.85% for the Growth Series, 0.96%
for the Value Series, 0.96% for the Emerging Growth Series and 0.89%
for the International Equity Series. The Global Bond Series will be availabe
May 1, 1996.
The following Examples demonstrate the cumulative expenses which would be paid
by the Policy Owner at 1-year, 3-year, 5-year, and 10-year intervals under
certain contingencies. Each Example assumes a $1,000 investment in a Subaccount
and a 5% annual return on assets. Because the expenses of the Underlying Series
differ, separate Examples are used to illustrate the expenses incurred by a
Policy Owner on an investment in the various Subaccounts.
THE INFORMATION GIVEN UNDER THE FOLLOWING EXAMPLES SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR
LESSER THAN THOSE SHOWN.
(a) If you surrender your Policy or annuitize* under a commutable period
certain option or a noncommutable period certain option of less than 10
years at the end of the applicable period, you would pay the following
expenses on a $1,000 investment, assuming 5% annual return on assets:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
Equity/Income $87 $137 $168 $253
High Yield $87 $138 $168 $254
Capital Reserves $87 $138 $169 $256
Money Market $87 $136 $165 $248
Growth $88 $140 $173 $263
Multiple Strategy $87 $137 $167 $252
Value $88 $140 $173 $263
Emerging Growth $88 $140 $173 $263
Int'l. Equity $88 $140 $173 $263
Global Bond $88 $140 $173 $263
</TABLE>
(b) If you annuitize* under a life option or any noncommutable period certain
option of 10 years or more at the end of the applicable time period or if
you do NOT surrender or annuitize your Policy, you would pay the following
expenses on a $1,000 investment, assuming 5% annual return on assets:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
Equity/Income $22 $69 $118 $253
High Yield $22 $69 $118 $254
Capital Reserves $23 $70 $119 $256
Money Market $22 $67 $115 $248
Growth $23 $72 $123 $263
Multiple Strategy $22 $69 $117 $252
Value $23 $72 $123 $263
Emerging Growth $23 $72 $123 $263
Int'l. Equity $23 $72 $123 $263
Global Bond $23 $72 $123 $263
</TABLE>
Pursuant to requirements of the 1940 Act, the Policy Fee has been reflected in
the Examples by a method intended to show the "average" impact of the Policy Fee
on an investment in the Separate Account. The total Policy Fees collected under
the Policies by the Company are divided by the total average net assets
attributable to the Policies. The resulting percentage is 0.09%, and the amount
of the policy fee is assumed to be $.90 in the Examples. The Policy Fee is
deducted only when the accumulated value is $50,000 or less.
* The Policy fee is not deducted after annuitization. No contingent deferred
sales charge is assessed at the time of annuitization in any policy year under
an option including a life contingency or under any noncommutable period certain
option of 10 years or more. Under Policy Form B, the expenses above would
average a few dollars LESS.
-8-
<PAGE>
CONDENSED FINANCIAL INFORMATION
First Allmerica Financial Life Insurance Company
Separate Account VA-K
<TABLE>
<CAPTION>
1995 1994
------ ------
<S> <C> <C>
Subaccount 201
Unit Value:
Beginning of Period 1.006 1.000
End of Period 1.351 1.006
Number of Units Outstanding at End 670 455
of Period (in thousands)
Subaccount 202
Unit Value:
Beginning of Period 0.980 1.000
End of Period 1.116 0.980
Number of Units Outstanding at End 475 287
of Period (in thousands)
Subaccount 203
Unit Value:
Beginning of Period 0.991 1.000
End of Period 1.115 0.991
Number of Units Outstanding at End 195 181
of Period (in thousands)
Subaccount 204
Unit Value:
Beginning of Period 1.018 1.000
End of Period 1.059 1.018
Number of Units Outstanding at End 126 302
of Period (in thousands)
Subaccount 205
Unit Value:
Beginning of Period 1.008 1.000
End of Period 1.287 1.008
Number of Units Outstanding at End 300 149
of Period (in thousands)
</TABLE>
-9-
<PAGE>
<TABLE>
<CAPTION>
1995 1994
------ ------
<S> <C> <C>
Subaccount 206
Unit Value:
Beginning of Period 0.991 1.000
End of Period 1.238 0.991
Number of Units Outstanding at End
of Period (in thousands) 304 173
Subaccount 207
Unit Value:
Beginning of Period 1.004 1.000
End of Period 1.128 1.004
Number of Units Outstanding at End 358 193
of Period (in thousands)
Subaccount 208
Unit Value:
Beginning of Period 1.002 1.000
End of Period 1.223 1.002
Number of Units Outstanding at End 146 82
of Period (in thousands)
Subaccount 209
Unit Value:
Beginning of Period 1.022 1.000
End of Period 1.404 1.022
Number of Units Outstanding at End
of Period (in thousands) 1,486 790
Subaccount 210
Unit Value:
Beginning of Period 1.000 n/a
End of Period 1.000 n/a
Number of Units Outstanding at End 0
of Period (in thousands)
</TABLE>
* The date of inception of Subaccount 204 was 4/6/94. The date of inception
of Subaccounts 205, 206, and 207 was 4/19/94. The date of inception of
Subaccount 201 was 4/28/94. The date of inception of Subaccounts 208 and
209 was 5/10/94. The date of inception of Subaccount 202 was 5/20/94. The
date of inception of Subaccount 203 was 6/22/94. The date of inception
for Subaccount 210, will be 5/1/96.
PERFORMANCE INFORMATION
The Contracts were first offered to the public in 1991. However, the Company
may advertise "Total Return" and "Average Total Return" performance
information based on the periods that the Underlying Funds have been in
existence. The results for any period prior to the Contracts being offered
will be calculated as if the Contracts had been offered during that period of
time, with all charges assumed to be those applicable to the Sub-Accounts and
the Underlying Funds.
The "total return" of a Subaccount refers to the total of the income
generated by an investment in the Subaccount and of the changes in the value
of the principal (due to realized and unrealized capital gains or losses) for
a specified period, reduced by certain charges, and expressed as a percentage
of the investment.
The "yield" of the Subaccount investing in the Money Market Series of the
Fund refers to the income generated by an investment in the Subaccount over a
seven-day period (which period will be specified in the advertisement). This
income is then "annualized" by assuming that the income generated in the
specific week is generated over a 52-week period. This annualized yield is
shown as a percentage of the investment. The "effective yield" calculation is
similar, but when annualized , the income earned by an investment in the
Subaccount is assumed to be reinvested. Thus the "effective yield" will be
slightly higher than the "yield" because of the compounding effect of this
assumed reinvestment.
The total return, yield, and effective yield figures are adjusted to reflect
the Subaccount's asset charges. The total return figures also reflect the $30
annual Policy Fee and the contingent deferred sales load which would be
assessed if the investment were completely redeemed at the end of the
specified period.
The Company may also advertise supplemental total return performance
information. Supplemental total return refers to the total of the income
generated by an investment in the Subaccount and of the changes of value of
the principal invested (due to realized and unrealized capital gains or
losses), adjusted by the Subaccounts annual asset charges, and expressed as a
percentage of the investment. Because it is assumed that the investment is
NOT redeemed at the end of the specified period, the contingent deferred
sales load is NOT included in the calculation of supplemental total return.
Performance information for a Subaccount may be compared, in reports and
promotional literature, to: (i) the Standard & Poor's 500 Stock Index ("S & P
500"), Dow Jones Industrial Average ("DJIA"), Shearson Lehman Aggregate Bond
Index or other unmanaged indices so that investors may compare the Subaccount
results with those of a group of unmanaged securities widely regarded by
investors as representative of the securities markets in general; (ii) other
groups of variable annuity separate accounts or other investment products
tracked by Lipper Analytical Services, a widely used independent research
firm which ranks mutual funds and other investment products by overall
performance, investment objectives, and assets, or tracked by other services,
companies, publications, or persons, such as 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 in the Subaccount. Unmanaged indices may assume the
reinvestment of dividends but generally do not reflect deductions for
administrative and management costs and expenses.
Performance information for any Subaccount reflects only the performance of a
hypothetical investment in the Subaccount during the particular time period
on which the calculations are based. Performance information should be
considered in light of the investment objectives and policies,
characteristics and quality of the portfolio of the Underlying Series in
which the Subaccount invests and the market conditions during the given
-10-
<PAGE>
time period, and should not be considered as a representation of what may be
achieved in the future.
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1995
-----------------------------------------------------------------
(Assuming COMPLETE redemption of the investment)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Total Return for 10 Years
NAME year ended 3 years 5 years or since
12/31/95 ------- ------- Inception
-------- ---------
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
International Equity 5.32% 7.16% N/A 7.06%
Value 15.15% N/A N/A 6.93%
Emerging Growth 30.32% N/A N/A 13.43%
Growth 20.77% 8.22% N/A 8.97%
Multiple Strategy 17.85% 7.49% N/A 10.47%
Equity Income 27.27% 12.78% N/A 8.35%
High Yield 6.92% 5.74% N/A 8.29%
Capital Reserves 5.51% 2.55% N/A 5.65%
Money Market -2.53% 0.24% N/A 3.68%
Global Bond N/A N/A N/A N/A
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1995
-----------------------------------------------------------------
(Assuming NO redemption of the investment)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Total Return for 10 Years
NAME year ended 3 years 5 years or since
12/31/95 ------- ------- Inception
-------- ---------
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
International Equity 12.32% 9.16% N/A 8.66%
Value 22.15% N/A N/A 10.14%
Emerging Growth 37.32% N/A N/A 16.47%
Growth 27.77% 10.18% N/A 9.77%
Multiple Strategy 24.85% 9.47% N/A 10.47%
Equity Income 34.27% 14.59% N/A 8.35%
High Yield 13.92% 7.78% N/A 8.29%
Capital Reserves 12.51% 4.72% N/A 5.65%
Money Market 4.03% 2.44% N/A 3.68%
Global Bond N/A N/A N/A N/A
</TABLE>
The Dates of Inception of the Underlying Funds are: 7/28/88 for Multiple
Strategy, Equity Income, High Yield, Capital Reserves, and Money Market;
7/12/91 for Growth; 1/29/92 for International Equity; 12/27/93 for Emerging
Growth and Value; 4/30/96 for Global Bond.
WHAT IS AN ANNUITY?
In general, an annuity is a policy designed to provide a retirement income
in the form of monthly payments for the lifetime of the purchaser or an
individual chosen by the purchaser. The retirement income payments are called
"annuity payments," and the individual receiving the payments is called the
"Annuitant." Annuity payments may begin immediately after a lump sum
purchase is made or may begin after an investment period during which the
amount necessary to provide the desired amount of retirement income is
accumulated.
Under an annuity policy, the insurance company assumes a mortality risk and
an expense risk. The mortality risk arises from the insurance company's
guarantee that annuity payments will continue for the life of the Annuitant,
regardless of how long the Annuitant lives or how long all Annuitants as a
group live. The expense risk arises from the insurance company's guarantee
that charges will not be increased beyond the limits specified in the policy,
regardless of actual costs of operations.
The Policy Owner's purchase payments, less any applicable deductions, are
invested by the insurance company. After retirement, annuity payments are
paid to the Annuitant for life or for such other period chosen by the Policy
Owner. In the case of a "fixed" annuity, the value of these annuity payments
is guaranteed by the insurance company, which assumes the risk of making the
investments to enable it to make the guaranteed payments. For more
information about fixed annuities see APPENDIX A, "MORE INFORMATION ABOUT THE
GENERAL ACCOUNT."
With a variable annuity, the value of the Policy and the annuity payments are
not guaranteed but will vary depending on the investment performance of a
portfolio of securities. Any investment gains or losses are reflected in the
value of the Policy and in the annuity payments. If the portfolio increases
in value, the value of the Policy increases. If the portfolio decreases in
value, the value of the Policy decreases.
RIGHT TO REVOKE OR SURRENDER
The Policy Owner may revoke the Policy at any time between the date of the
application and the date 10 days after receipt of the Policy. Within seven
days the Company will return the greater of (1) the entire purchase payment
or (2) the Accumulated Value plus any amounts deducted under the Policy or by
the Fund for taxes, charges or fees. In order to Revoke the Policy, the
Policy Owner must mail or deliver the Policy (if it has already been
received) to the agent through whom the Policy was purchased, to the
principal office of the Company at 440 Lincoln Street, Worcester,
Massachusetts 01653, or to any local agency of the Company. Mailing or
delivery must occur on or before 10 days after receipt of the Policy for
revocation to be effective.
The liability of the Separate Accounts under this provision is limited to the
Policy Owner's Accumulated value in each Separate Account on the date of
cancellation. Any additional amounts refunded to the Policy Owner will be
paid by the Company.
The refund of any premium paid by check may be delayed until the check has
cleared the Policy Owner's bank.
DESCRIPTION OF THE COMPANY, THE
SEPARATE ACCOUNT, AND THE FUND
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
-11-
<PAGE>
company and adopted its present anme. The Company is a wholly-owned subsidiary
of Allmerica Financial Corporation ("AFC"). The Company's principal office is
located at 440 Lincoln Street, Worcester, Massachusetts 01653, telephone
508-855-1000 (Principal Office).
The Company is subject to the laws of the Commonwealth of Massachusetts
governing insurance companies and to regulation by the Commissioner of
Insurance of Massachusetts. In addition, the Company is subject to the
insurance laws and regulations of other states and jurisdictions in which it
is licensed to operate.
THE SEPARATE ACCOUNT - Separate Account VA-K (the "Separate Account") is a
separate investment account of the Company. The assets used to fund the
variable portions of the Policies are set aside in the Subaccounts of the
Separate Account, and are kept separate and apart from the general assets of
the Company. There are ten Subaccounts available under the Policies. Each
Subaccount is administered and accounted for as part of the general business
of the Company, but the income, capital gains, or capital losses of each
Subaccount are allocated to such Subaccount, without regard to other income,
capital gains, or capital losses of the Company. Under Massachusetts law, the
assets of the Separate Account may not be charged with any liabilities
arising out of any other business of the Company.
The Separate Account was authorized by vote of the Board of Directors of the
Company on August 20, 1991. The Separate Account meets the definition of
"separate account" under federal securities laws and is registered with the
Securities and Exchange Commission ("Commission") as a unit investment trust
under the Investment Company Act of 1940 ("1940 Act"). Such registration does
not involve the supervision of management or investment practices or policies
of the Separate Account or the Company by the Commission.
The Company offers other variable annuity contracts investing in the Separate
Account which are not discussed in this prospectus. The Separate Account also
invests in other underlying funds which are not available to the Policies
described in this prospectus.
The Company reserves the right, subject to compliance with applicable law, to
change the names of the Separate Account and the Subaccounts.
DELAWARE GROUP PREMIUM FUND, INC. - Delaware Group Premium Fund, Inc. (the
"Fund"), 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
Fund or its separate investment series.
The Fund was established to provide a vehicle for the investment of assets of
various separate accounts supporting variable insurance policies. The Fund
currently has ten investment portfolios ("Series"), each issuing a series of
shares: Equity/Income Series, High Yield Series, Capital Reserves Series,
Money Market Series, Growth Series, Multiple Strategy Series, Value Series,
Emerging Growth Series, Global Bond Series and International Equity Series.
The assets of each Series are held separate from the assets of the other
Series. Each Series operates as a separate investment vehicle, and the income
or losses of one Series have no effect on the investment performance of
another Series. Shares of the Fund are not offered to the general public but
solely to separate accounts of life insurance companies.
The investment adviser for the Equity/Income Series, High Yield Series,
Capital Reserves Series, Money Market Series, Growth Series and Multiple
Strategy Series is Delaware Management Company, Inc. (the "Delaware
Management"). The investment adviser for the International Equity Series and
the Global Bond Series is Delaware International Advisers Ltd. ("Delaware
International").
INVESTMENT OBJECTIVES AND POLICIES - A summary of investment objectives of
each of the Underlying Series is set forth below. More detailed information
regarding the investment objectives, restrictions and risks, expenses paid by
the Underlying Series, and other relevant information regarding the
Underlying Series may be found in the Prospectus of the Fund, which
accompanies this Prospectus and should be read carefully before investing.
Also, the Statement of Additional Information of the Fund is available upon
request.
SUBACCOUNT 201 - invests solely in shares of the Equity/Income Series. This
Series seeks the highest possible total rate of return by selecting issues
that exhibit the potential for capital appreciation while providing higher
than average dividend income.
SUBACCOUNT 202 - invests solely in shares of the High Yield Series. This
Series seeks as high a current income as possible by investing in rated and
unrated corporate bonds (including high-yield bonds commonly known as junk
bonds), U.S. Government securities and commercial paper. Please read the
Fund's prospectus disclosure regarding the risk factors before investing in
this Series.
SUBACCOUNT 203 - invests solely in shares of the Capital Reserves Series.
This Series seeks a high stable level of current income while minimizing
fluctuations in principal by investing in a diversified portfolio of short
and intermediate-term securities.
SUBACCOUNT 204 - invests solely in shares of the Money Market Series. This
Series seeks the highest level of income consistent with the preservation of
capital and liquidity through investments in short-term money market
instruments.
-12-
<PAGE>
SUBACCOUNT 205 - invests solely in shares of the Growth Series. This Series
seeks long-term capital appreciation by investing its assets in a diversified
portfolio of securities exhibiting the potential for significant growth.
SUBACCOUNT 206 - invests solely in shares of the Multiple Strategy Series.
This Series seeks a balance of capital appreciation, income and preservation
of capital. It uses a dividend-oriented valuation strategy to select
securities issued by established companies that are believed to demonstrate
potential for income and capital growth.
SUBACCOUNT 207 - invests solely in shares of the International Equity Series.
This Series 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.
SUBACCOUNT 208 - invests solely in shares of the Value Series. This Series
seeks capital appreciation by investing in small to mid-cap common stocks
whose market value appears low relative to their underlying value or future
earnings and growth potential. Emphasis will also be placed on securities of
companies that may be temporarily out of favor or whose value is not yet
recognized by the market.
SUBACCOUNT 209 - invests solely in shares of the Emerging Growth Series. This
Series seeks long-term capital appreciation by investing primarily in
small-cap common stocks and convertible securities of emerging and other
growth-oriented companies. These securities will have been judged to be
responsive to changes in the market place and to have fundamental
characteristics to support growth. Income is not an objective.
Subaccount 210 invests solely in shares of the Global Bond Series. The
Global Series seeks current income consistent with preservation of principal
by investing primarily in fixed income securities that may also provide the
potential for capital appreciation. At least 65% of the Series's assets will
be invested in fixed income securities of issuers organized or having a
majority of their assets in or deriving a majority of their operating income
in at least three different countries, one of which may be the United States.
There is no assurance that the investment objectives of the Series will be
met.
In the event of a material change in the investment policy of a Subaccount or
the Underlying Series in which it invests, you will be notified of the
change. No material changes in the investment policy of the Separate Account
or any Subaccounts will be made without approval pursuant to the applicable
state insurance laws. If you have Policy Value in that Subaccount, the
Company will transfer it without charge on written request by you to another
Subaccount or to the General Account. The Company must receive your written
request within sixty (60) days of the later of (1) the effective date of such
change in the investment policy or (2) the receipt of the notice of your
right to transfer.
INVESTMENT ADVISORY SERVICES TO THE FUND - For managing the portfolios of the
Underlying Series and making the investment decisions, each investment
adviser is paid an annual fee by their respective Underlying Series. For
Delaware Management, this fee is equal to 5/10 of 1% of the average daily net
assets of the Money Market Series, 3/4 of 1% of the average daily net assets
of the Growth Series, Value Series and Emerging Growth Series, and 6/10 of 1%
of the average daily net assets of the Equity/Income Series, High Yield
Series, Capital Reserve Series, Multiple Strategy Series. For Delaware
International, this fee is equal to 3/4 of 1% of the average daily net assets
of the International Equity Series.
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 Subaccounts or that the
Subaccounts may purchase. If the shares of any Underlying Series are no
longer available for investment or if in the Company's judgment further
investment in any Underlying Series should become inappropriate in view of
the purposes of the Separate Account or the affected Subaccount, the Company
may redeem the shares of that Underlying Series and substitute shares of
another registered open-end management company. The Company will not
substitute any shares attributable to a Policy interest in a Subaccount
without notice to the Policy Owner and prior approval of the Commission and
state insurance authorities, to the extent required by the 1940 Act or other
applicable law. The Separate Account may, to the extent permitted by law,
purchase other securities for other policies or permit a conversion between
policies upon request by a Policy Owner.
The Company also reserves the right to establish additional Subaccounts of
the Separate Account, each of which would invest in shares corresponding to a
new Underlying Series 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
Subaccounts or eliminate one or more Subaccounts if marketing needs, tax
considerations or investment conditions warrant. Any new Subaccounts may be
made available to existing Policy Owners on a basis to be determined by the
Company.
Shares of the Underlying Series are sold to separate accounts of unaffiliated
insurance companies ("shared funding") which issue variable annuity and
variable life policies ("mixed funding"). It is conceivable that in the
future such shared funding or mixed funding may be disadvantageous for
variable life Policy Owners or variable annuity Policy Owners. Although the
Company and the Fund do not currently foresee any such disadvantages to
either variable life insurance Policy Owners or variable annuity Policy
Owners, the Company and the Trustees of the Fund intend to monitor events in
order to identify any material conflicts and to determine what action, if
any, should be taken in response thereto.
If 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 Policy
-13-
<PAGE>
Owners of all such changes. If the Company deems it to be in the best
interest of Policy Owners, and subject to any approvals that may be required
under applicable law, the Separate Account or any Subaccount(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 Subaccounts or other separate accounts of the Company.
VOTING RIGHTS
The Company will vote Underlying Series shares held by each Subaccount in
accordance with instructions received from Policy Owners and, after Annuity
Date, from the Annuitants. Each person having a voting interest in a
Subaccount will be provided with proxy materials of the Underlying Series
together with a form with which to give voting instructions to the Company.
Shares for which no timely instructions are received will be voted in
proportion to the instructions which are received. The Company will also vote
shares in a Subaccount that it owns and which are not attributable to
Policies in the same proportion. If the 1940 Act or any rules thereunder
should be amended or if the present interpretation of the 1940 Act or such
rules should change, and as a result the Company determines that it is
permitted to vote shares in its own right, whether or not such shares are
attributable to the Policies, the Company reserves the right to do so.
The number of votes which a Policy Owner or Annuitant may cast will be
determined by the Company as of the record date established by the Underlying
Series.
During the accumulation period, the number of Underlying Series shares
attributable to each Policy Owner will be determined by dividing the dollar
value of the Accumulation Units of the Subaccount credited to the Policy by
the net asset value of one Underlying Series share.
During the annuity period, the number of Underlying Series shares
attributable to each Annuitant will be determined by dividing the reserve
held in each Subaccount for the Annuitant's variable annuity by the net asset
value of one Underlying Series share. Ordinarily, the Annuitant's voting
interest in the Underlying Series will decrease as the reserve for the
variable annuity is depleted.
CHARGES AND DEDUCTIONS
Deductions under the Policies and charges against the assets of the
Subaccounts are described below. Other deductions and expenses paid out of
the assets of the Underlying Series are described in the Prospectus and
Statement of Additional Information of the Fund.
A. CONTINGENT DEFERRED SALES CHARGE.
No charge for sales expense is deducted from purchase payments at the time
the payments are made. However, a contingent deferred sales charge is
deducted from the Accumulated Value of the Policy in the case of surrender
and/or partial redemption of the Policy or at the time annuity payments
begin, within certain time limits described below.
For purposes of determining the contingent deferred sales charge, the Policy
Value is divided into three categories: (1) New Payments - purchase payments
received by the Company during the seven years preceding the date of the
surrender; (2) Old Payments - purchase payments not defined as New Payments;
and (3) Earnings - the amount of Policy Value in excess of all purchase
payments that have not been previously surrendered. For purposes of
determining the amount of any contingent deferred sales charge, surrenders
will be deemed to be taken first from Old Payments, then from New Payments.
Old Payments may be withdrawn from the Policy at any time without the
imposition of a contingent deferred sales charge. If a withdrawal is
attributable all or in part to New Payments, a contingent deferred sales
charge may apply.
Except in New York, no contingent deferred sales charge is imposed, and no
commissions are paid, on Policies issued after December 20, 1993 where the
Policy Owner and Annuitant as of the date of application are both within the
following class of individuals:
All employees and registered representatives of any broker-dealer that has
entered into a sales agreement with the Company to sell the Policies; all
officers, directors, trustees and bona fide full-time employees (including
former officers and directors and former employees who had been employed
for at least ten years) of Delaware Management, its affiliates and
subsidiaries, and of any Underlying Series; and any spouses of the above
persons or any children or other legal dependents of the above persons who
are under the age of 21.
Pursuant to Section 11 of the 1940 Act and Rule 11a-2 thereunder, the
contingent deferred sales charge is modified to effect certain exchanges of
annuity contracts for the Policies, as provided in APPENDIX B, "EXCHANGE
OFFER."
CHARGES FOR SURRENDER AND PARTIAL REDEMPTION. If a Policy is surrendered, or
if New Payments are redeemed, while the Policy is in force and before the
Annuity Date, a contingent deferred sales charge may be imposed. The amount
of the charge will depend upon the number of years that the New Payments, if
any, to which the withdrawal is attributed have remained credited under the
Policy. Amounts withdrawn are deducted first from Old Payments. Then, for
the purpose of calculating surrender charges for New Payments, all amounts
withdrawn are assumed to be deducted first from the earliest New Payment and
then from the next earliest New Payment and so on, until all New Payments
have been exhausted
-14-
<PAGE>
pursuant to the first-in-first-out ("FIFO") method of accounting. (See
"FEDERAL TAX CONSIDERATIONS" for a discussion of how withdrawals are treated
for income tax purposes.)
The Contingent Deferred Sales Charges are as follows:
The amount redeemed equals the amount requested by the Policy Owner plus the
charge, if any, which is applied against the amount requested. For example,
if the applicable charge is 7% and the Policy Owner has requested $200, the
Policy Owner will receive $200 and the charge will be $14 (assuming no
Withdrawal Without Charge Amount, discussed below) for a total withdrawal of
$214. The charge is applied as a percentage of the New Payments redeemed.
Such total charge equals the aggregate of all applicable contingent deferred
sales charges for surrender, partial redemptions, and annuitization.
WITHDRAWAL WITHOUT CHARGE AMOUNTS.
POLICY FORM A. Under Policy Form A, in each calendar year, the Company
will waive the contingent deferred sales charge, if any, on an amount
("Withdrawal Without Charge Amount") equal to the greatest of (1), (2) or (3):
Where (1) is:
The Accumulated Value as of the Valuation Date coincident with or next
following the date of receipt of the request for withdrawal, reduced by total
gross payments not previously redeemed ("Cumulative Earnings").
Where (2) is:
10% of the Accumulated Value as of the Valuation Date coincident with or
next following the date of receipt of the request for withdrawal, reduced by
the total amount of any prior partial redemptions made in the same calendar
year to which no contingent deferred sales charge was applied.
Where (3) is:
The amount calculated under the Company's life expectancy distribution (see
"LED Distributions," below), whether or not the withdrawal was part of such
distribution (applies only if the Policy Owner and Annuitant are the same
individual).
For example, an 81-year-old Policy Owner/Annuitant with an Accumulated Value
of $15,000, of which $1,000 is Cumulative Earnings, would have a Withdrawal
Without Charge Amount of $1,530, which is equal to the greatest of:
(1) Cumulative Earnings ($1,000);
(2) 10% of Accumulated Value ($1,500); or
(3) LED distribution of 10.2% of Accumulated
Value ($1,530).
POLICY FORM B. Under Policy Form B, the Withdrawal Without Charge Amount is
The greater of (1) 10% of the Accumulated Value as of December 31 of the
previous calendar year, or (2) the life expectancy distribution, if
applicable. The Withdrawal Without Charge Amount is deducted first from Old
Payments, then from the earliest New Payments and so on until all New
Payments have been exhausted pursuant to the FIFO (first-in-first-out) method
of accounting.
Under the Policies, the Withdrawal Without Charge Amount will first be
deducted from Cumulative Earnings. If the Withdrawal Without Charge Amount
exceeds Cumulative Earnings, the excess amount will be deemed withdrawn from
payments not previously redeemed on a last-in-first-out ("LIFO") basis. If
more than one partial withdrawal is made during the year, on each subsequent
withdrawal the Company will waive the contingent deferred sales load, if any,
until the entire Withdrawal Without Charge Amount has been redeemed.
LED DISTRIBUTIONS. Prior to the Annuity Date, a Policy Owner who is also the
Annuitant may elect to make a series of systematic withdrawals from the
Policy according to a life expectancy distribution ("LED"). The LED may be
elected by returning a properly signed LED request form to the Company's
Principal Office. The LED permits the Policy Owner to make systematic
withdrawals from the Policy over his or her lifetime. The amount withdrawn
from the Policy changes each year, because life expectancy changes each year
that a person lives. For example, actuarial tables indicate that a person age
70 has a life expectancy of 16 years, but a person who attains age 86 has a
life expectancy of another 6.5 years.
If a Policy Owner elects the LED, in each policy year a fraction of the
Accumulated Value is withdrawn from the Policy based on the Policy Owner's
then life expectancy. The numerator of the fraction is 1 (one) and the
denominator of the fraction is the remaining life expectancy of the Policy
Owner, as determined annually by the Company. The resulting fraction,
expressed as a percentage, is applied to the Accumulated Value of the Policy
at the beginning of the year to determine the amount to be distributed during
the year. The Policy Owner may elect monthly, bimonthly, quarterly,
semiannual, or annual distributions, and may terminate the LED at any time.
The Policy Owner may also elect to receive distributions under an LED which
is determined on the joint life expectancy of the Policy Owner and a
beneficiary. The Company may also offer other systematic withdrawal options.
The LED will cease on the Annuity Date.
If a Policy Owner makes withdrawals under the LED distribution prior to age
59 1/2, the withdrawals may be treated
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by the IRS as premature distributions from the Policy. The payments would
then be taxed on an "income first" basis, and be subject to a 10% federal tax
penal ty. For more information, see "FEDERAL TAX CONSIDERATIONS, B. Taxation
of the Policies in General."
SURRENDERS. In the case of a complete surrender, the amount received by the
Policy Owner is equal to the entire Accumulated Value under the Policy, net
of the applicable contingent deferred sales charge on New Payments, the
Policy Fee and any applicable tax withholding. Subject to the same rules that
are applicable to partial redemptions, the Company will not assess a
contingent deferred sales charge on an amount equal to the greater of the
Withdrawal Without Charge Amount, described above, or the life expectancy
distribution, if applicable. Because Old Payments count in the calculation of
the Withdrawal Without Charge Amount, if Old Payments equal or exceed the
Withdrawal Without Charge Amount, the Company may assess the full applicable
contingent deferred sales charge on New Payments.
Where a Policy Owner who is trustee under a pension plan surrenders, in whole
or in part, a Policy on a terminating employee, the trustee will be permitted
to reallocate all or a part of the total Accumulated Value under the Policy
to other policies issued by the Company and owned by the trustee, with no
deduction for any otherwise applicable contingent deferred sales charge. Any
such reallocation will be at the unit values for the Subaccounts as of the
valuation date on which a written, signed request is received at the
Company's Principal Office.
For further information on surrender and partial redemption, including
minimum limits on amount redeemed and amount remaining under the Policy in
the case of partial redemption, and important tax considerations, see
"Surrender" and "Partial Redemption" under "THE VARIABLE ANNUITY POLICIES,"
and see "FEDERAL TAX CONSIDERATIONS."
CHARGE AT THE TIME ANNUITY PAYMENTS BEGIN. If a period certain option is
chosen (Option V or the comparable fixed annuity option), a contingent
deferred sales charge will be deducted from the Accumulated Value of the
Policy if the Annuity Date occurs at any time during the surrender charge
period. Such charge is the same as that which would apply had the policy been
surrendered on the Annuity Date.
No contingent deferred sales charge is imposed at the time of annuitization
in any policy year under an option involving a life contingency (Options I,
II, III, IV-A, IV-B or the comparable fixed annuity options) or involving a
non-commutable period certain of a duration of ten years or more.
SALES EXPENSE. The Company pays commissions on the Policies of up to 6.5% of
purchase payments to entities which sell the Policies. To the extent
permitted by NASD rules, expense reimbursement allowances and additional
payments for other services not directly related to the sale of the Policies,
including the recruitment and training of personnel, production of
promotional literature, and similar services may also be made.
The Company intends to recoup the commissions and other sales expenses
through a combination of anticipated contingent deferred sales charges,
described above, 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 contingent deferred sales charges assessed on a
Policy will be retained by the Company.
B. PREMIUM TAXES. Some states and municipalities impose a premium tax on
variable annuity policies. State premium taxes currently range up to 3.5%.
The Company makes a charge for state and municipal premium taxes, when
applicable, and deducts the amount paid as a premium tax charge. The current
practice of the Company is to deduct the premium tax charge in one of two
ways:
(1) if the premium tax was paid by the Company when purchase payments were
received, to the extent permitted in your Policy the premium tax charge is
deducted on a pro rata basis when partial withdrawals are made, upon
surrender of the Policy, or when annuity payments begin (the Company
reserves the right instead to deduct the premium tax charge for these
Policies at the time the purchase payments are received); or
(2) the premium tax charge is deducted when annuity payments begin.
If no amount for premium tax was deducted at the time the purchase payment
was received, but subsequently tax is determined to be due prior to the
Annuity Date, the Company reserves the right to deduct the premium tax from
the Policy value at the time such determination is made.
C. POLICY FEE.
A $30 Policy Fee currently is deducted on the policy anniversary date and
upon full surrender of the Policy when the Accumulated Value is $50,000 or
less. The Policy Fee is not deducted after annuitization. The Policy Fee is
currently waived for policies issued to a trustee of a 401(k) plan, but the
Company reserves the right to impose the Policy Fee on such policies.
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Where policy value has been allocated to more than one account (General
Account and/or one or more of the Subaccounts), a percentage of the total
Policy Fee will be deducted from the Policy Value in each account. The
portion of the charge deducted from each account will be equal to the
percentage which the Policy Value in that account represents of the total
Accumulated Value under the Policy. The deduction of the Policy Fee will
result in cancellation of a number of Accumulation Units equal in value to
the percentage of the charge deducted from that account.
D. ANNUAL CHARGES AGAINST SEPARATE ACCOUNT ASSETS.
MORTALITY AND EXPENSE RISK CHARGE. The Company makes a charge of 1.25% on an
annual basis of the daily value of each Subaccount's assets to cover the
mortality and expense risk which the Company assumes in relation to the
variable portion of the Policies. The charge is imposed during both the
accumulation period and the annuity period. The mortality risk arises from
the Company's special death benefit guarantee and its guarantee that it will
make annuity payments in accordance with annuity rate provisions established
at the time the Policy is issued for the life of the Annuitant (or in
accordance with the annuity option selected), no matter how long the
Annuitant (or other payee) lives and no matter how long all Annuitants as a
class live. Therefore, the mortality charge is deducted during the annuity
phase on all contracts, including those that do not involve a life
contingency, even though the Company does not bear direct mortality risk with
respect to variable annuity settlement options that do not involve life
contingencies. The expense risk arises from the Company's guarantee that the
charges it makes will not exceed the limits described in the Policies and in
this Prospectus.
If the charge for mortality and expense risks is not sufficient to cover
actual mortality experience and expenses, the Company will absorb the losses.
If expenses are less than the amounts provided to the Company by the charge,
the difference will be a profit to the Company. To the extent this charge
results in a profit to the Company, such profit will be available for use by
the Company for, among other things, the payment of distribution, sales and
other expenses.
Since mortality and expense risks involve future contingencies which are not
subject to precise determination in advance, it is not feasible to identify
specifically the portion of the charge which is applicable to each. The
Company estimates that a reasonable allocation might be .80% for mortality
risk and .45% for expense risk.
ADMINISTRATIVE EXPENSE CHARGE - The Company assesses each Subaccount
available under the Policies with a daily charge at an annual rate of 0.15%
of the average daily net assets of the Subaccount. The charge is imposed
during both the accumulation period and the annuity period. The daily
Administrative Expense Charge is assessed to help defray administrative
expenses actually incurred in the administration of the Subaccount, without
profits. However, there is no direct relationship between the amount of
administrative expenses imposed on a given policy and the amount of expenses
actually attributable to that policy.
Deductions for the Policy Fee (described under B. POLICY FEE) and for the
Administrative Expense Charge are designed to reimburse the Company for the
cost of administration and related expenses and are not expected to be a
source of profit. The administrative functions and expense assumed by the
Company in connection with the Separate Account and the Policies include, but
are not limited to, clerical, accounting, actuarial and legal services, rent,
postage, telephone, office equipment and supplies, expenses of preparing and
printing registration statements, expense of preparing and typesetting
prospectuses and the cost of printing prospectuses not allocable to sales
expense, filing and other fees.
TRANSFER CHARGE - The Company currently makes no charge for transfers. The
Company guarantees that the first twelve transfers in a Policy Year will be
free of charge, but reserves the right to assess a charge, guaranteed never
to exceed $25, for the thirteenth and each subsequent transfer in a Policy
Year.
The Policy Owner may have automatic transfers of at least $100 a month made
on a periodic basis (a) from Subaccount 203 (which invests in the Capital
Reserve Series) or Subaccount 204 (which invests in the Money Market Series)
to one or more of the other Subaccounts, or (b) in order to reallocate Policy
Value among the Subaccounts. The first automatic transfer counts as one
transfer towards the twelve transfers which are guaranteed to be free in each
policy year. For more information, see "The Policy Transfer Privilege."
OTHER CHARGES - Because the Subaccounts purchase shares of the Fund, the
value of the net assets of the Subaccounts will reflect the investment
advisory fee and other expenses incurred by the Underlying Series. The
Prospectus and Statement of Additional Information of the Fund contain
additional information concerning expenses of the Underlying Series.
THE VARIABLE ANNUITY POLICIES
The Policies are designed for use in connection with several types of
retirement plans as well as for sale to individuals. Participants under such
plans, as well as Policy Owners, and beneficiaries, are cautioned that the
rights of any person to any benefits under such Policies may be subject to
the terms and conditions of the plans themselves, regardless of the terms and
conditions of the Policies.
The Policies offered by the Prospectus may be purchased from
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representatives of Allmerica Investments, Inc. and certain independent
broker-dealers that are registered under the Securities Exchange Act of 1934
and are members of the National Association of Securities Dealers, Inc.
(NASD). The principal underwriter of the Policies is Allmerica Investments,
Inc., 440 Lincoln Street, Worcester, Massachusetts, 01653, a wholly-owned
subsidiary of the Company. Policy Owners may direct any inquiries to Annuity
Customer Service, First Allmerica Financial Life Insurance Company of
America, 440 Lincoln Street, Worcester, Massachusetts 01653.
A. PURCHASE PAYMENTS.
Purchase payments are payable to the Company. The initial payment will be
credited to the Policy as of the date that the properly completed application
which accompanies the payment is received by the Company at its principal
office. If an application is incomplete, or does not specify how payments are
to be allocated among the Accounts, the initial purchase payment will be
returned within five business days. After a policy is issued, Accumulation
Units will be credited to the Policy at the unit value computed as of the
Valuation Date that a purchase payment is received at the Company's principal
office.
Purchase payments are not limited as to frequency and number, but there are
certain limitations as to amount. Generally, the initial payment must be at
least $600. Under a salary deduction or a monthly automatic payment plan, the
minimum initial payment is $50. In all cases, each subsequent payment must be
at least $50. Where the contribution on behalf of an employee under an
employer-sponsored retirement plan is less than $600 but more than $300
annually, the Company may issue a Policy on the employee, if the plan's
average annual contribution per eligible plan participant is at least $600.
Total payments may not exceed the maximum limit specified in the Policy. If
the payments are divided among two or more accounts, a net amount of at least
$10 of each payment must be allocated to each account.
Generally, payments will be allocated among the Subaccounts according to the
Policy Owner's instructions when the Policy is issued. However, for the first
14 days following the date of issue, all Separate Account allocations will be
held in Subaccount 204 (the Money Market Series). Thereafter, all amounts
will be allocated according to the Policy Owner's instructions. The Policy
Owner may change allocation instructions for new payments pursuant to written
or telephone request. If telephone requests are elected by the Policy Owner,
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 Policy Owner identify themselves by name and identify
the Annuitant by name, date of birth and social security number. All transfer
instructions by telephone are tape recorded.
B. TRANSFER PRIVILEGE.
At any time prior to the Annuity Date, subject to the Company's then current
rules, a Policy Owner may have amounts transferred among the Subaccounts or
between a Subaccount and the General Account. Transfer values will be
effected at the Accumulation Value next computed after receipt of the
transfer order. The Company will make transfers pursuant to written or
telephone request. As discussed in "A. Purchase Payments," a properly
completed authorization form must be on file before telephone requests will
be honored.
The Policy Owner may have automatic transfers of at least $100 each made on a
periodic basis from Subaccount 203 (which invests in the Capital Reserve
Series) or Subaccount 204 (which invests in the Money Market Series) to one
or more of the other Subaccounts or reallocate policy value among the
Subaccounts. Automatic transfers may be made on a monthly, bimonthly,
quarterly, semiannual or annual schedule. The first automatic transfer
counts as one transfer towards the twelve transfers which are guaranteed to
be free in each policy year.
Automatic transfers may also be made from policy value allocated to the
Company's General Account (a) to one or more of the Subaccounts or (b) in
order to reallocate Policy value among the Subaccounts. Automatic transfers
from the General Account may be made on a monthly, bimonthly, or quarterly
basis, provided that: (i) the amount of each monthly transfer cannot exceed
10% of policy value in the General Account as of the date of the first
transfer, (ii) each bimonthly transfer cannot exceed 20% of policy value in
the General Account as of the date of the first transfer, (iii) each
quarterly transfer cannot exceed 25% of policy value in the General Account
as of the date of the first transfer.
Transfers involving the General Account are also permitted 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.
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, (2) the minimum
amount that may remain in a Subaccount following a transfer from that
Subaccount, (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.
Currently, the Company makes no charge for transfers. The first twelve
transfers in a Policy year are guaranteed to be free of any charge. For the
thirteenth and each subsequent transfer in a Policy year the Company reserves
the right to assess a charge, guaranteed never to exceed $25, to reimburse it
for the expense of processing transfers.
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C. SURRENDER.
At any time prior to the Annuity Date, a Policy Owner may surrender the
Policy and receive its Accumulated Value, less applicable charges ("Surrender
Amount"). The Policy Owner must return the Policy and a signed, written
request for surrender, satisfactory to the Company, to the Company's
Principal Office. The amount payable to the Policy Owner upon surrender will
be based on the Accumulated Value of the Policy as of the Valuation Date on
which the request and the Policy are received at the Company's Principal
Office.
Before the Annuity Date, a contingent deferred sales charge may be deducted
when a Policy is surrendered if payments have been credited to the policy
during the last seven full policy years. See "CHARGES AND DEDUCTIONS." The
Policy Fee will be deducted upon surrender of the Policy.
After the Annuity Date, only Policies under which future annuity payments are
limited to a specified period (as specified in Annuity Option V) may be
surrendered. The Surrender Amount is the commuted value of any unpaid
installments, computed on the basis of the assumed interest rate incorporated
in such annuity payments. No contingent deferred sales charge is imposed
after the Annuity Date.
Any amount surrendered is normally payable within seven days following the
Company's receipt of the surrender request. The Company reserves the right to
defer surrenders and partial redemptions of amounts in each Subaccount during
any period which (1) trading on the New York Stock Exchange is restricted as
determined by the SEC or such Exchange is closed for other than weekends and
holidays, (2) the SEC has by order permitted such suspension, or (3) an
emergency, as determined by the SEC, exists such that disposal of portfolio
securities or valuation of assets of each Separate Account is not reasonably
practicable.
The right is reserved by the Company to defer surrenders and partial
redemptions of amounts allocated to the Company's General Account for a
period not to exceed six months.
The surrender rights of Policy Owners who are participants under Section
403(b) plans or who are participants in the Texas Optional Retirement Program
(Texas ORP) are restricted; see "FEDERAL TAX CONSIDERATIONS," "I. Public
School Systems and Certain Tax Exempt Organizations" and "J. Texas Optional
Retirement Program."
For important tax consequences which may result from surrender, see "FEDERAL
TAX CONSIDERATIONS."
D. PARTIAL REDEMPTION.
At any time prior to the Annuity Date, a Policy Owner may redeem a portion of
the Accumulated Value of his or her Policy, subject to the limits stated
below. The Policy Owner must file a signed, written request for redemption,
satisfactory to the Company, at the Company's Principal Office. The written
request must indicate the dollar amount the Policy Owner wishes to receive
and the account from which such amount is to be redeemed. The amount redeemed
equals the amount requested by the Policy Owner plus any applicable
contingent deferred sales charge, as described under "CHARGES AND DEDUCTIONS."
Where allocations have been made to more than one account, a percentage of
the partial redemption may be allocated to each such account. A partial
redemption from a Subaccount will result in cancellation of a number of units
equivalent in value to the amount redeemed, computed as of the Valuation Date
that the request is received at the Company's principal office.
Each partial redemption must be in a minimum amount of $100. No partial
redemption will be permitted if the Accumulated Value remaining under the
Policy would be reduced to less than $1,000.
Partial redemptions will be paid in accordance with the time limitations
described under "Surrender."
After the Annuity Date, only Policies under which future variable annuity
payments are limited to a specified period may be partially redeemed. A
partial redemption after the Annuity Date will result in cancellation of a
number of Annuity Units equivalent in value to the amount redeemed.
For important restrictions on withdrawals which are applicable to Policy
Owners who are participants under Section 403(b) plans or under the Texas
ORP, see "FEDERAL TAX CONSIDERATIONS," "I. Public School Systems and Certain
Tax Exempt Organizations" and "J. Texas Optional Retirement Program."
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For important tax consequences which may result from partial redemptions, see
"FEDERAL TAX CONSIDERATIONS."
E. DEATH BENEFIT.
If the Annuitant dies (or a Policy Owner predeceases the Annuitant) prior to
the Annuity Date while the Policy is in force, a death benefit will be paid
to the beneficiary, except where the Policy continues as provided in "F. The
Spouse of the Policy Owner as Beneficiary". Upon death of the Annuitant
(including a Policy Owner who is also the Annuitant), the death benefit is
equal to the greatest of (a) the Accumulated Value under the Policy next
determined following receipt of due proof of death at the Principal Office,
or (b) the total amount of gross payment(s) made under the Policy reduced
proportionally to reflect the amount of all prior partial withdrawals, or (c)
the death benefit that would have been payable on the most recent fifth year
policy anniversary, increased for subsequent purchase payments and reduced
proportionally to reflect withdrawals after that date.
POLICY FORM A: Under Policy Form A, the guaranteed death benefit is reduced
proportionally to reflect partial withdrawals (in the same proportion that
the Accumulated Value was reduced by the withdrawals).
A partial withdrawal will reduce the gross payments available as a death
benefit under (b) in the same proportion that the Accumulated Value was
reduced on the date of withdrawal. For each withdrawal, the reduction is
calculated by multiplying the total amount of gross payments by a fraction,
the numerator of which is the amount of the partial withdrawal and the
denominator of which is the Accumulated Value immediately prior to the
withdrawal. For example, if gross payments total $8,000 and a $3,000
withdrawal is made when the Accumulated Value is $12,000, the proportional
reduction of gross payments available as a death benefit is calculated as
follows: The Accumulated Value is reduced by 1/4 (3,000 divided by 12,000);
therefore, the gross amount available as a death benefit under (b) will also
be reduced by 1/4 (8,000 times 1/4 equals $2,000), so that the $8,000 gross
payments are reduced to $6,000. Payments made after a withdrawal will
increase the death benefit available under (b) by the amount of the payment.
A partial withdrawal after the most recent fifth year Policy anniversary will
decrease the death benefit available under (c) in the same proportion that
the Accumulated Value was reduced on the date of the withdrawal. For example,
if the death benefit that would have been payable on the most recent fifth
year Policy anniversary is $12,000 and partial withdrawals totalling $5,000
are made thereafter when the Accumulated Value is $15,000, the proportional
reduction of death benefit available under (c) is calculated as follows: The
Accumulated Value is reduced by 1/3 (5,000 divided by 15,000); therefore, the
death benefit that would have been payable on the most recent fifth year
Policy anniversary will also be reduced by 1/3 (12,000 times 1/3 or $4,000),
so that the death benefit available under (c) will be $8,000 ($12,000 minus
$4,000). Payments made after the most recent fifth year Policy anniversary
will increase the death benefit available under (c) by the amount of the
payment.
POLICY FORM B: Under Policy Form B, partial withdrawals are subtracted from
the guaranteed death benefit. For example, if gross payments total $8,000
and a $3,000 withdrawal is made, and no prior withdrawals had taken place,
the guaranteed minimum death benefit is $5,000 ($8,000 minus $3,000) or the
accumulated value, if higher. Future payments will increase the guaranteed
minimum death benefit dollar for dollar just as future withdrawals reduce it
dollar for dollar.
Additionally, the stepped-up death benefit under Policy Form B applies to the
most recent seventh year Policy anniversary. For example, if the death
benefit on the most recent seventh anniversary is $10,000 and a $3,000
withdrawal is made, and prior payments were $5,000, the guaranteed minimum
death benefit is $7,000 ($10,000 minus $3,000). Future payments will
increase the guaranteed minimum death benefit dollar for dollar just as
future withdrawals reduce it dollar for dollar.
Effiective November 1, 1995, automotic transfers may also be made from policy
value allocated to the Company's General Account (a) to one or more of the
Subaccounts or (b) in order to reallocate Policy value among the Subaccounts.
Automatic transfers from the General Account may be made on a monthly,
bimonthly, or quarterly basis, provided that: (I) the amount of each monthly
transfer cannot exceed 10% of policy value in the General Account as of the
date of the first transfer; (ii) each bimonthly transfer cannot exceed 20% of
policy value in the General Account as of the date of the first transfer;
(iii) each quarterly transfer cannot exceed 25% of policy value in the
General Account as of the date of the first transfer.
Upon death of a Policy Owner who is not the Annuitant, the death benefit is
equal to the Accumulated Value of the Policy next determined following
receipt of due proof of death received at the Principal Office.
The death benefit generally will be paid to the beneficiary in one sum.
However, the beneficiary may, by written request, elect one of the following
options:
(1) The payment of the one sum may be delayed for a period not to exceed
five years from the date of death.
(2) The death benefit may be paid in installments. Payments must begin
within one year from the date of death, and are payable over a period
certain not extended beyond the life expectancy of the beneficiary.
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(3) All or a portion of the death benefit may be used to provide a life
annuity for the beneficiary. Benefits must begin within one year from
the date of death and are payable over a period not extended beyond the
life expectancy of the beneficiary. Any annuity benefits will be
provided in accordance with the annuity options of the Policy.
If there is more than one beneficiary, the death benefit will be paid to such
beneficiaries in one sum unless the Company consents to pay an annuity option
chosen by the beneficiaries.
With respect to any death benefit, the Accumulated Value under the Policy
shall be based on the unit values next computed after due proof of death has
been received at the Company's principal office. If the beneficiary elects to
receive the death benefit in one sum, the death benefit will be paid within
seven business days. If the beneficiary (other than a spousal beneficiary of
an IRA, See "F. The Spouse of the Policy Owner as Beneficiary," below) has
not elected an annuity option within one year from the date notice of death
is received by the Company, the Company will pay the death benefit in one
sum. The death benefit will reflect any earnings or losses experienced during
the period and any withdrawals.
If the Annuitant's death occurs on or after the Annuity Date but before the
completion of all guaranteed monthly annuity payments, any unpaid amounts or
installments will be paid to the beneficiary. The Company must pay the
remaining payments at least as rapidly as under the payment option in effect
on the date of the Annuitant's death. If there is more than one beneficiary,
the commuted value of the payments, computed on the basis of the assumed
interest rate incorporated in the annuity option table on which such payments
are based, shall be paid to the beneficiaries in one sum.
F. THE SPOUSE OF THE POLICY OWNER AS BENEFICIARY.
If the Policy Owner's spouse is named as beneficiary ("spousal beneficiary")
and if the Policy Owner dies (and predeceases the Annuitant if such Policy
Owner is not the Annuitant) prior to the Annuity Date while the Policy is in
force, at the written request of the spousal beneficiary the death benefit
will not be paid and the spousal beneficiary will become the new Policy Owner
(and, if the deceased Owner was also the Annuitant, the new Annuitant). All
other rights and benefits provided in the Policy will continue, except that
any subsequent spouse of such new Policy Owner will not be entitled to
continue the Policy upon such new Policy Owner's death.
G. ASSIGNMENT.
The Policy may be assigned by the Policy Owner at any time prior to the
Annuity Date and while the Annuitant is alive. However, Policies sold in
connection with IRA plans and certain other qualified plans are not
assignable. Assignability of a Policy issued in connection with an HR-10 Plan
may be restricted. For more information about these plans, see "FEDERAL TAX
CONSIDERATIONS."
The Company will not be deemed to have knowledge of an assignment unless it
is made in writing and filed at the Company's principal office. The Company
will not assume responsibility for determining the validity of any
assignment. If an assignment of the Policy is in effect on the Annuity Date,
the Company reserves the right to pay to the assignee, in one sum, that
portion of the Surrender Value of the Policy to which the assignee appears to
be entitled. The Company will pay the balance, if any, in one sum to the
Policy Owner in full settlement of all liability under the Policy. The
interest of the Policy Owner and of any beneficiary will be subject to any
assignment.
H. ELECTING THE FORM OF ANNUITY AND THE ANNUITY DATE.
Subject to certain restrictions described below, the Policy Owner has the
right (1) to select the annuity option under which annuity payments are to be
made, and (2) to determine whether payments are to be made on a fixed basis,
a variable basis, or a combination fixed and variable basis. Annuity payments
are determined according to the annuity tables in the Policy, by the annuity
option selected, and by the investment performance of the Account(s) selected.
To the extent a fixed annuity is selected, Accumulated Value will be
transferred to the General Account of the Company, and the annuity payments
will be fixed in amount. See APPENDIX A, "MORE INFORMATION ABOUT THE GENERAL
ACCOUNT."
Under a variable annuity, a payment equal to the value of the fixed number of
Annuity Units in the Subaccount(s) is made each month. Since the value of an
Annuity Unit in a Subaccount will reflect the investment performance of the
Subaccount, the amount of each monthly payment will vary.
The annuity option selected must produce an initial payment of at least $20.
If a combination of fixed and variable payments is selected, the initial
payment on each basis must be at least $20. The Company reserves the right to
increase these minimum amounts. If the annuity option(s) selected does not
produce initial payments which meet these minimums, the Company will pay the
Accumulated Value in one sum. Once the Company begins making annuity
payments, the Annuitant cannot make partial redemptions or surrender the
annuity benefit, except in the case where future annuity payments are limited
to a "period certain" (only under Option V or a comparable fixed option).
Only beneficiaries entitled to receive remaining payments for a "period
certain" may elect to instead receive a lump sum settlement.
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The Annuity Date is selected by the Policy Owner. The Annuity Date may
be the first day of any month on or after the Annuitant's 50th birthday but
before the Annuitant's 85th birthday, with certain exceptions the Company may
arrange. The Policy Owner may elect to change the Annuity Date by sending a
request to the Company's Principal Office at least one month before the new
Annuity Date. The new Annuity Date must be the first day of any month
occurring on or after the Annuitant's 50th birthday but before the
Annuitant's 85th birthday. The new Annuity Date must be within the life
expectancy of the Annuitant. The Company shall determine such life expectancy
at the time a change in Annuity Date is requested. The Internal Revenue Code
and the terms of qualified plans impose limitations on the age at which
annuity payments may commence and the type of annuity option selected. See
"FEDERAL TAX CONSIDERATIONS" for further information.
If the Policy Owner does not elect otherwise, annuity payments will be made
in accordance with Option I, a variable life annuity with 120 monthly
payments guaranteed. Changes in either the Annuity Date or annuity option can
be made up to one month prior to the Annuity Date.
I. DESCRIPTION OF VARIABLE ANNUITY OPTIONS.
The Company currently provides the variable annuity options described below.
Variable annuity options may be funded through the Equity/Income Series, the
Capital Reserves Series and the Multiple Strategy Series.
The Company also provides fixed-amount annuity options which are comparable
to the variable annuity options. Regardless of how payments were allocated
during the accumulation period, any one of the variable annuity options or
the fixed-amount options may be selected, or any one of the variable annuity
options may be selected in combination with any one of the fixed-amount
annuity options. Other annuity options may be offered by the Company.
OPTION I--Variable Life Annuity with 120 Monthly Payments Guaranteed
A variable annuity payable monthly during the lifetime of the payee with the
guarantee that if the payee should die before 120 monthly payments have been
paid, the monthly annuity payments will continue to the beneficiary until a
total of 120 monthly payments have been paid.
OPTION II--Variable Life Annuity
A variable annuity payable monthly only during the lifetime of the payee. It
would be possible under this option for the Annuitant to receive only one
annuity payment if the Annuitant dies prior to the due date of the second
annuity payment, two annuity payments if the Annuitant dies before the due
date of the third annuity payment, and so on. However, payments will continue
during the lifetime of the payee, no matter how long the payee lives.
OPTION III--Unit Refund Variable Life Annuity
A variable annuity payable monthly during the lifetime of the payee with the
guarantee that if (1) exceeds (2) then monthly variable annuity payments will
continue to the beneficiary until the number of such payments equals the
number determined in
(1).
Where:
(1) is the dollar amount of the Accumulated Value divided by the dollar
amount of the first monthly payment (which determines the greatest
number of payments payable to the beneficiary), and
(2) is the number of monthly payments paid prior to the death of the payee,
OPTION IV-A--Joint and Survivor Variable Life Annuity
A monthly variable annuity payable jointly to two payees during their joint
lifetime, and then continuing during the lifetime of the survivor. The amount
of each payment to the survivor is based on the same number of Annuity Units
which applied during the joint lifetime of the two payees. One of the payees
must be either the person designated as the Annuitant in the Policy or the
beneficiary. There is no minimum number of payments under this option. See
Option IV-B, below.
OPTION IV-B--Joint and Two-thirds Survivor Variable Life Annuity. A monthly
variable annuity payable jointly to two payees during their joint lifetime,
and then continuing thereafter during the lifetime of the survivor. However,
the amount of each monthly payment to the survivor is based upon two-thirds
of the number of Annuity Units which applied during the joint lifetime of the
two payees. One of the payees must be the person designated as the Annuitant
in the Policy or the beneficiary. There is no minimum number of payments
under this option. See Option IV-A, above.
OPTION V--Period Certain Variable Annuity
A monthly variable annuity payable for a stipulated number of from one to thirty
years.
It should be noted that Option V does not involve a life contingency. In the
computation of the payments under this option, the charge for annuity rate
guarantees, which includes a factor for mortality risks, is made. Although
not contractually required to do so, the Company currently follows a practice
of permitting persons receiving payments under Option V to elect to convert
to a variable annuity involving a life contingency. The Company may
discontinue or change this practice at any time, but not with respect to
Policy Owners who have elected Option V prior to the date of any change in
this practice. See "FEDERAL TAX CONSIDERATIONS" for a discussion of the
possible adverse
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tax consequences of selecting Option V.
J. NORRIS DECISION.
In the case of ARIZONA GOVERNING COMMITTEE V. NORRIS, the United States
Supreme Court ruled that, in connection with retirement benefit options
offered under certain employer-sponsored employee benefit plans, annuity
options based on sex-distinct actuarial tables are not permissible under
Title VII of the Civil Rights Act of 1964. The ruling requires that benefits
derived from contributions paid into a plan after August 1, 1983 be
calculated without regard to the sex of the employee. Annuity benefits
attributable to payments received by the Company under a policy issued in
connection with an employer-sponsored benefit plan affected by the Norris
decision will be based on the greater of (1) the Company's unisex
Non-Guaranteed Current Annuity Option Rates or (2) the guaranteed male rates
described in such Policy, regardless of whether the Annuitant is male or
female.
K. COMPUTATION OF POLICY VALUES AND ANNUITY PAYMENTS.
THE ACCUMULATION UNIT. Each net purchase payment is allocated to the
account(s) selected by the Policy Owner. Allocations to the Subaccounts are
credited to the Policy in the form of Accumulation Units. Accumulation Units
are credited separately for each Subaccount. The number of Accumulation Units
of each Subaccount credited to the Policy is equal to the portion of the net
purchase payment allocated to the Subaccount, 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
resulting from each payment will remain fixed unless changed by a subsequent
split of Accumulation Unit value, a transfer, a partial redemption, or
surrender. The dollar value of an Accumulation Unit of each Subaccount varies
from Valuation Date to Valuation Date based on the investment experience of
that Subaccount and will reflect the investment performance, expenses and
charges of its Underlying Series. The value of an Accumulation Unit was set
at $1.00 on the first Valuation Date for each Subaccount.
Allocations to the General Account are not converted into Accumulation Units,
but are credited interest at a rate periodically set by the Company. See
APPENDIX A, "MORE INFORMATION ABOUT THE GENERAL ACCOUNT."
The Accumulated Value under the Policy is determined by (1) multiplying the
number of Accumulation Units in each Subaccount by the value of an
Accumulation Unit of that Subaccount on the Valuation Date, (2) adding the
products, and (3) adding the amount of the accumulations in the General
Account, if any.
ADJUSTED GROSS INVESTMENT RATE. At each Valuation Date an adjusted gross
investment rate for each Subaccount for the Valuation Period then ended is
determined from the investment performance of that Subaccount. Such rate is
(1) the investment income of that Subaccount for the Valuation Period, plus
capital gains and minus capital losses of that Subaccount for the Valuation
Period, whether realized or unrealized, adjusted for provisions made for
taxes, if any, divided by (2) the amount of that Subaccount's assets at the
beginning of the Valuation Period. The adjusted gross investment rate may be
either positive or negative.
NET INVESTMENT RATE AND NET INVESTMENT FACTOR. The net investment rate for a
Subaccount's variable accumulations for any Valuation Period is equal to the
adjusted gross investment rate of the Subaccount for such Valuation Period
decreased by the equivalent for such period of a charge equal to 1.40% per
annum. This charge cannot be increased.
The net investment factor is 1.000000 plus the applicable net investment rate.
The dollar value of an Accumulation Unit as of a given Valuation Date is
determined by multiplying the dollar value of the corresponding Accumulation
Unit as of the immediately preceding Valuation Date by the appropriate net
investment factor.
For an illustration of Accumulation Unit calculation using a hypothetical
example see "ANNUITY PAYMENTS" in the Statement of Additional Information.
THE ANNUITY UNIT. On and after the Annuity Date the Annuity Unit is a measure
of the value of the Annuitant's monthly annuity payments under a variable
annuity option. The value of an Annuity Unit in each Subaccount initially was
set at $1.00. The value of an Annuity Unit under a Subaccount on any
Valuation Date thereafter is equal to the value of such unit on the
immediately preceding Valuation Date, multiplied by the product of (1) the
net investment factor of the Subaccount for the current Valuation Period and
(2) a factor to adjust benefits to neutralize the assumed interest rate. The
assumed interest rate, discussed below, is incorporated in the variable
annuity options offered in the Policy.
DETERMINATION OF THE FIRST AND SUBSEQUENT ANNUITY PAYMENTS. The first monthly
annuity payment is based upon the Accumulated Value as of a date not more
than four weeks preceding the date the first annuity payment is due.
Currently, variable annuity payments are made on the first of the month based
on unit values as of the 15th day of the preceding month.
The Policy provides annuity rates which determine the dollar amount of the
first monthly payment under each form of annuity for each $1,000 of applied
value (Accumulated Value applied under a specific annuity option to provide
annuity income payments, minus any applicable premium tax). The
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annuity rates in the Policy are based on a modification of the 1983 Table on
rates.
The amount of the first monthly payment depends upon the form of annuity
selected, the sex (however, see "J. Norris Decision") and age of the
Annuitant and the value of the amount applied under the annuity option. The
variable annuity options offered by the Company are based on a 3 1/2% assumed
interest rate. Variable payments are affected by the assumed interest rate
used in calculating the annuity option rates. Variable annuity payments will
increase over periods when the actual net investment result of the
Subaccount(s) funding the annuity exceeds the equivalent of the assumed
interest rate for the period. Variable Annuity Payments will decrease over
periods when the actual net investment result of the respective Subaccount is
less than the equivalent of the assumed interest rate for the period.
The dollar amount of the first monthly annuity payment under a life
contingency or a noncommutable period certain option of at least a 10 year
option is determined by multiplying (1) the Accumulated Value applied under
that option (after deduction for premium tax, if any) divided by $1,000, by
(2) the applicable amount of the first monthly payment per $1,000 of value.
For any commutable period certain options and for noncommutable period
certain options, the Surrender Value less any premium tax is applied. The
dollar amount of the first monthly variable annuity payment is then divided
by the value of an Annuity Unit of the selected Subaccount(s) to determine
the number of Annuity Units represented by the first payment. This number of
Annuity Units remains fixed under all annuity options except the joint and
two-thirds survivor annuity option. In each subsequent month, the dollar
amount of the variable annuity payment is determined by multiplying this
fixed number of Annuity Units by the value of an Annuity Unit on the
applicable Valuation Date.
After the first payment, the dollar amount of each monthly variable annuity
payment will vary with subsequent variations in the value of the Annuity Unit
of the selected Subaccount(s). The dollar amount of each fixed amount monthly
annuity payment is fixed and will not change, except under the joint and
two-thirds survivor annuity option.
The Company may from time to time offer its Policy Owners both fixed and
variable annuity rates more favorable than those contained in the Policy. Any
such rates will be applied uniformly to all Policy Owners of the same class.
For an illustration of variable annuity payment calculation using a
hypothetical example, see "ANNUITY PAYMENTS" in the Statement of Additional
Information.
FEDERAL TAX CONSIDERATIONS
The effect of federal income taxes on the value of a Policy, on redemptions
or surrenders, on annuity payments, and on the economic benefit to the
Annuitant, or beneficiary depends upon a variety of factors. The following
discussion is based upon the Company's understanding of current federal
income tax laws as they are interpreted as of the date of this Prospectus. No
representation is made regarding the likelihood of continuation of current
federal income tax laws or of current interpretations by the Internal Revenue
Service (IRS).
IT SHOULD BE RECOGNIZED THAT THE FOLLOWING DISCUSSION OF FEDERAL INCOME TAX
ASPECTS OF AMOUNTS RECEIVED UNDER VARIABLE ANNUITY POLICIES IS NOT
EXHAUSTIVE, DOES NOT PURPORT TO COVER ALL SITUATIONS AND IS NOT INTENDED AS
TAX ADVICE. A QUALIFIED TAX ADVISER SHOULD ALWAYS BE CONSULTED WITH REGARD TO
THE APPLICATION OF LAW TO INDIVIDUAL CIRCUMSTANCES.
The Company intends to make a charge for any effect which the income, assets,
or existence of the Policies, the Separate Account or the Subaccounts may
have upon its tax. The Separate Account presently is not subject to tax, but
the Company reserves the right to assess a charge for taxes should the
Separate Account at any time become subject to tax. Any charge for taxes will
be assessed on a fair and equitable basis in order to preserve equity among
classes of Policy Owners and with respect to each Separate Account as though
that Separate Account were a separate taxable entity.
The Separate Account is considered to be a part of and taxed with the
operations of the Company. The Company is taxed as a life insurance company
under subchapter L of the Code. The Company files a consolidated tax return
with its affiliates.
The Internal Revenue Service has issued regulations relating to the
diversification requirements for variable annuity and variable life insurance
contracts under Section 817(h) of the Internal Revenue Code ("Code"). The
regulations provide that the investments of a segregated asset account
underlying a variable annuity contract are adequately diversified if no more
than 55% of the value of its assets is represented by any one investment, no
more than 70% by any two investments, no more than 80% by any three
investments, and no more than 90% by any four investments. If the investments
are not adequately diversified, the income on a contract, for any taxable
year of the Policy Owner, would be treated as ordinary income received or
accrued by the Policy Owner. It is anticipated that the Underlying Series
will comply with the diversification requirements.
A. QUALIFIED AND NON-QUALIFIED POLICIES.
From a federal tax viewpoint there are two types of variable
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annuity Policies, "qualified" Policies and "non-qualified" Policies. A
qualified Policy is one that is purchased in connection with a retirement
plan which meets the requirements of Sections 401, 403, 408, or 457 of the
Code, while a non-qualified Policy is one that is not purchased in connection
with one of the indicated retirement plans. The tax treatment for certain
partial redemptions or surrenders will vary according to whether they are
made from a qualified Policy or a non-qualified Policy. For more information
on the tax provisions applicable to qualified Policies, see Sections D
through J, below.
B. TAXATION OF THE POLICIES IN GENERAL.
The Company believes that the Policies described in this Prospectus will,
with certain exceptions (see K below), be considered annuity policies under
Section 72 of the Internal Revenue Code (the "Code"). This section provides
for the taxation of annuities. The following discussion concerns annuities
subject to Section 72. Section 72(e)(11)(A)(ii) requires that all
non-qualified deferred annuity policies issued by the same insurance company
to the same Policy Owner during the same calendar year be treated as a single
Policy in determining taxable distributions under Section 72(e).
With certain exceptions, any increase in the Accumulated Value of the Policy
is not taxable to the Policy Owner until it is withdrawn from the Policy. If
the Policy is surrendered or amounts are withdrawn prior to the Annuity Date,
to the extent of the amount withdrawn any investment gain in value over the
cost basis of the Policy would be taxed as ordinary income. Under the current
provisions of the Code, amounts received under a non-qualified Policy prior
to the Annuity Date (including payments made upon the death of the Annuitant
or Policy Owner), or as non-periodic payments after the Annuity Date, are
generally first attributable to any investment gains credited to the Policy
over the taxpayer's basis (if any) in the Policy. Such amounts will be
treated as income subject to federal income taxation.
A 10% penalty tax may be imposed on the withdrawal of investment gains if the
withdrawal is made prior to age 59-1/2. The penalty tax will not be imposed
after age 59-1/2, or if the withdrawal follows the death of the Policy Owner
(or, if the Policy Owner is not an individual, the death of the primary
Annuitant, as defined in the Code), or in the case of the "total disability"
(as defined in the Code) of the Policy Owner. Furthermore, under Section 72
of the Code, this penalty tax will not be imposed, irrespective of age, if
the amount received is one of a series of "substantially equal" periodic
payments made at least annually for the life or life expectancy of the payee.
This requirement is met when the Policy Owner elects to have distributions
made over the Policy Owner's life expectancy, or over the joint life
expectancy of the Policy Owner and beneficiary. The requirement that the
amount be paid out as one of a series of "substantially equal" periodic
payments is met when the number of units withdrawn to make each distribution
is substantially the same.
In a private letter ruling, the IRS took the position that where
distributions from a variable annuity policy were determined by amortizing
the accumulated value of the policy over the taxpayer's remaining life
expectancy (such as under the Policy's life expectancy distribution ("LED")
option), and the option could be changed or terminated at any time, the
distributions failed to qualify as part of a "series of substantially equal
payments" within the meaning of Section 72 of the Code. The distributions
were therefore subject to the 10% federal penalty tax. This private letter
ruling may be applicable to a Policy Owner who receives distributions under
the LED option prior to age 59 1/2. Subsequent private letter rulings,
however, have treated LED-type withdrawal programs as effectively avoiding
the 10% penalty tax. The position of the IRS on this issue is unclear.
If the Policy Owner transfers (assigns) the Policy to another individual as a
gift prior to the Annuity Date, the Code provides that the Policy Owner will
incur taxable income at the time of the transfer. An exception is provided
for certain transfers between spouses. The amount of taxable income upon such
taxable transfer is equal to the excess, if any, of the cash surrender value
of the Policy over the Policy Owner's cost basis at the time of the transfer.
The transfer will also subject the Owner to a gift tax. Where the Policy
Owner and Annuitant are different persons, the change of ownership of the
Policy to the Annuitant on the Annuity Date, as required under the Policy, is
a gift and will be taxable to the Owner as such. However, the Owner will not
incur taxable income. Rather the Annuitant will incur taxable income upon
receipt of annuity payments as discussed below.
When annuity payments are commenced under the Policy, generally a portion of
each payment may be excluded from gross income. The excludable portion is
generally determined by a formula that establishes the ratio that the cost
basis of the Policy bears to the expected return under the Policy. The
portion of the payment in excess of this excludable amount is taxable as
ordinary income. Once all cost basis in the Policy is recovered, the entire
payment is taxable. If the last Annuitant dies before cost basis is
recovered, a deduction for the difference is allowed on the Annuitant's final
tax return.
C. TAX WITHHOLDING AND PENALTIES.
The Code requires withholding with respect to payments or distributions from
employee benefit plans, annuities, and IRAs, unless a taxpayer elects not to
have withholding. In addition, the Code requires reporting to the IRS of the
amount of income received with respect to payment or distributions from
annuities.
The tax treatment of certain partial redemptions or surrenders
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of the non-qualified Policies offered by this Prospectus will vary according
to whether the amount redeemed or surrendered is allocable to an investment
in the Policy made before or after certain dates.
D. PROVISIONS APPLICABLE TO QUALIFIED EMPLOYER PLANS.
The tax rules applicable to qualified employer plans, as defined by the Code,
vary according to the type of plan and the terms and conditions of the plan
itself. Therefore, the following is general information about the use of the
Policies with various types of qualified plans. The rights of any person to
any benefits under such qualified plans will be subject to the terms and
conditions of the qualified plans themselves regardless of the terms and
conditions of the Policy.
A loan to a participant or beneficiary from plans qualified under Sections
401 and 403 or an assignment or pledge of an interest in such a plan is
generally treated as a distribution. This general rule does not apply to
loans which contain certain repayment terms and do not exceed a specified
maximum amount, as required under Section 72(p).
E. QUALIFIED EMPLOYEE PENSION AND PROFIT SHARING TRUSTS AND QUALIFIED ANNUITY
PLANS.
When an employee (including a self-employed individual) or one or more of the
employee's beneficiaries receives a "lump sum" distribution (a distribution
from a qualified plan described in Code Section 401(a) within one taxable
year equal to the total amount payable with respect to such an employee) the
taxable portion of such distribution may qualify for special treatment under
a special five-year income averaging provision of the Code. The employee must
have had at least 5 years of participation under the plan, and the lump sum
distribution must be made after the employee has attained age 59 1/2 or on
account of his or her death, separation from the employer's service (in the
case of a common-law employee) or disability (in the case of a self-employed
individual). Such treatment can be elected for only one taxable year once the
individual has reached age 59 1/2. An employee who attained age 50 before
January 1, 1986 may elect to treat part of the taxable portion of a lump-sum
distribution as long-term capital gain and may also elect 10-year averaging
instead of five-year averaging.
The Company can provide prototype plans for certain of the pension or profit
sharing plans for review by your legal counsel. For information, ask your
agent.
F. SELF-EMPLOYED INDIVIDUALS.
The Self-Employed Individuals Tax Retirement Act of 1962, as amended,
frequently referred to as "H.R. 10," allows self-employed individuals and
partners to establish qualified pension and profit sharing trusts and annuity
plans to provide benefits for themselves and their employees.
These plans generally are subject to the same rules and requirements
applicable to corporate qualified plans, with some special restrictions
imposed on "owner-employees." An "owner-employee" is an employee who (1)
owns the entire interest in an unincorporated trade or business, or (2) owns
more than 10% of either the capital interest or profits interest in a
partnership.
G. INDIVIDUAL RETIREMENT ACCOUNT PLANS.
Any individual who earns "compensation" (as defined in the Code and including
alimony payable under a court decree) from employment or self-employment,
whether or not he or she is covered by another qualified plan, may establish
an Individual Retirement Account or Annuity plan ("IRA") for the accumulation
of retirement savings on a tax-deferred basis. Income from investments is not
included in "compensation." The assets of an IRA may be invested in, among
other things, annuity policies including the Policies offered by this
Prospectus.
Contributions to the IRA may be made by the individual or on behalf of the
individual by an employer. IRA contributions may be deductible up to the
lesser of (1) $2,000 or (2) 100% of compensation. The deduction is reduced
proportionately for adjusted gross income between $40,000 and $50,000
(between $25,000 and $35,000 for unmarried taxpayers and between $0 and
$10,000 for a married taxpayer filing separately) if the taxpayer and his or
her spouse file a joint return and either is an active participant in an
employer sponsored retirement plan.
An individual and a working spouse each may have an IRA with the
above-described limit on each. An individual with an IRA may establish an
additional IRA for a non-working spouse if they file a joint return.
Contributions to the two IRAs together are deductible up to the lesser of
$2,250 or 100% of compensation.
No deduction is allowed for contributions made for the year in which the
individual attains age 70 1/2 and years thereafter. Contributions for that
year and for years thereafter will result in certain adverse tax consequences.
Non-deductible contributions may be made to IRAs until the year in which the
individual attains age 70 1/2. Although these contributions may not be
deducted, taxes on their earnings are deferred until the earnings are
distributed. The maximum permissible non-deductible contribution is $2,000
for an individual taxpayer and $2,250 for a taxpayer and non-working spouse.
These limits are reduced by the amount of any deductible contributions made
by the taxpayer.
Contributions may be made with respect to a particular year
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until the due date of the individual's federal income tax return for
that year, not including extensions. However, for reporting purposes, the
Company will regard contributions as being applicable to the year made unless
it receives notice to the contrary.
All annuity payments and other distributions under an IRA will be taxed as
ordinary income unless the owner has made non-deductible contributions. In
addition, a minimum level of distributions must begin no later than April 1
following the year in which the individual attains age 70 1/2, and failure to
make adequate distributions at this time may result in certain adverse tax
consequences to the individual.
Distributions from all of an individual's IRAs are treated as if they were a
distribution from one IRA and all distributions during the same taxable year
are treated as if they were one distribution. An individual who makes a
non-deductible contribution to an IRA or receives a distribution from an IRA
during the taxable year must provide certain information on the individual's
tax return to enable the IRS to determine the proportion of the IRA balance
which represents non-deductible contributions. If the required information is
provided, that part of the amount withdrawn which is proportionate to the
individual's aggregate non-deductible contributions over the aggregate
balance of all of the individual's IRAs, is excludable from income.
Distributions which are a return of a non-deductible contribution are
non-taxable, as they represent a return of basis. If the required information
is not provided to the IRS, distributions from an IRA to which both
deductible and non-deductible contributions have been made are presumed to be
fully taxable.
H. SIMPLIFIED EMPLOYEE PENSIONS.
Employees may establish simplified employee pensions ("SEPs") under Code
Section 408(k) if certain requirements are met. A SEP is an IRA to which the
employer contributes under a written formula. Currently, a SEP may accept
employer contributions each year up to $30,000 or 15% of compensation (as
defined), whichever is less. To establish SEPs the employer must make a
contribution for every employee age 21 and over who has performed services
for the employer for at least three of the five immediately preceding
calendar years and who has earned at least $300 for the year.
The employer's contribution is excluded from the employee's gross income for
the taxable year for which it was made up to the $30,000/15% limit. In
addition to the employer's contribution, the employee may contribute 100% of
the employee's earned income, up to $2,000, to the SEP, but such
contributions will be subject to the rules described above in "F. Individual
Retirement Account Plans."
These plans are subject to the general employer's deduction limitations
applicable to all corporate qualified plans.
I. PUBLIC SCHOOL SYSTEMS AND CERTAIN TAX-EXEMPT ORGANIZATIONS.
Under the provisions of Section 403(b) of the Code, payments made for annuity
policies purchased for employees under annuity plans adopted by public school
systems and certain organizations which are tax exempt under Section
501(c)(3) of the Code are excludable from the gross income of such employees
to the extent that the aggregate purchase payments for such annuity policies
in any year do not exceed the maximum contribution permitted under the Code.
A Policy qualifying under Section 403(b) of the Code must provide that
withdrawals or other distributions attributable to salary reduction
contributions (including earnings thereon) may not begin before the employee
attains age 59 1/2, separates from service, dies, or becomes disabled. In the
case of hardship a Policy Owner may withdraw amounts contributed by salary
reduction, but not the earnings on such amounts. Even though a distribution
may be permitted under these rules (e.g., for hardship or after separation
from service), it may nonetheless be subject to a 10% penalty tax as a
premature distribution, in addition to income tax. Also, there is a mandatory
20% income tax withholding on any eligible rollover distribution, unless it
is a direct rollover to another qualified plan in accordance with IRS rules.
The distribution restrictions are effective for years beginning after
December 31, 1988, but only with respect to amounts that were not held under
the Policy as of that date.
J. TEXAS OPTIONAL RETIREMENT PROGRAM.
Under a Code Section 403(b) annuity policy issued as a result of
participation in the Texas Optional Retirement Program, distributions may not
be received except in the case of the participant's death, retirement or
termination of employment in the Texas public institutions of higher
education. These restrictions are imposed by reason of an opinion of the
Texas Attorney General interpreting the Texas laws governing the Optional
Retirement Program.
K. SECTION 457 PLANS FOR STATE GOVERNMENTS AND TAX-EXEMPT ENTITIES.
Code Section 457 allows employees of a state, one of its political
subdivisions, or certain tax-exempt entities to participate in eligible
government deferred compensation plans. An eligible plan, by its terms, must
not allow deferral of more than $7,500 or 33 1/3% of a participant's
includible compensation for the taxable year, whichever is less. Includible
compensation does not include amounts excludable under the eligible deferred
compensation plan or amounts paid into a Code Section 403(b) annuity. The
amount a participant
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may defer must be reduced dollar-for-dollar by elective deferrals under a
SEP, 401(k) plan or a deductible employee contribution to a 501(c)(18) plan.
Under eligible deferred compensation plans the state, political subdivision,
or tax-exempt entity will be owner of the Policy.
If an employee also participates in another eligible plan or contributes to a
Code Section 403(b) annuity, a single limit of $7,500 will be applied for all
plans. Additionally, the employee must designate how much of the $7,500 or 33
1/3% limitation will be allocated among the various plans. Contributions to
an eligible plan will serve to reduce the maximum exclusion allowance for a
Code Section 403(b) annuity.
Amounts received by employees under such plans generally are includible in
gross income in the year of receipt.
L. NON-INDIVIDUAL OWNERS.
Non-individual Owners (e.g., a corporation) of deferred annuity contracts
generally will be currently taxed on any increase in the cash surrender value
of the deferred annuity attributable to contributions made after February 28,
1986. This rule does not apply to immediate annuities or to deferred
annuities held by a qualified pension plan, an IRA, a 403(b) plan, estates,
employers with respect to terminated pension plans, or a nominee or agent
holding a contract for the benefit of an individual. Corporate-owned
annuities may result in exposure to the alternative minimum tax, to the
extent that such corporate-owned annuities result in an increase in a
corporation's book income. For tax years beginning after 1989,
corporate-owned annuities may result in exposure to the alternative minimum
tax, to the extent that income on the annuities increases the corporation's
adjusted current earnings.
REPORTS
A Policy Owner is sent a report semi-annually which states certain financial
information about the Underlying Series. The Company will also furnish an
annual report to the Policy Owner containing a statement of his or her
account, including unit values and other information required by applicable
law, rules and regulations.
LOANS (QUALIFIED POLICIES ONLY)
Loans will be permitted only for TSAs and Policies issued to a plan qualified
under Section 401(a) and 401(k) of the Code. Loans are made from the Policy's
value on a pro-rata basis from all accounts. The maximum loan amount is the
amount determined under the Company's maximum loan formula for qualified
plans. The minimum loan amount is $1,000. Loans will be secured by a security
interest in the Policy. Loans are subject to applicable retirement
legislation and their taxation is determined under the Federal income tax
laws. The amount borrowed will be transferred to a fixed, minimum guarantee
loan assets account in the Company's General Account, where it will accrue
interest at a specified rate below the then current loan interest rate.
Generally, loans must be repaid within five (5) years. When repayments are
received, they will be allocated in accordance with the contract owner's most
recent allocation instructions.
The amount of the death benefit, the amount payable on a full surrender and
the amount applied to provide an annuity on the Annuity Date will be reduced
to reflect any outstanding loan balance (plus accrued interest thereon).
Partial withdrawals may be restricted by the maximum loan limitation.
CHANGES IN OPERATION OF THE
SEPARATE ACCOUNT
The Company reserves the right, subject to compliance with applicable law, to
(1) transfer assets from any Separate Account or Subaccount to another of the
Company's separate accounts or Subaccounts having assets of the same class,
(2) to operate the Separate Account or any Subaccount as a management
investment company under the 1940 Act or in any other form permitted by law,
(3) to deregister the Separate Account under the 1940 Act in accordance with
the requirements of the 1940 Act and (4) to substitute the shares of any
other registered investment company for the Underlying Series shares held by
a Subaccount, in the event that Underlying Series shares are unavailable for
investment, or if the Company determines that further investment in such
Underlying Series shares is inappropriate in view of the purpose of the
Subaccount, (5) to change the methodology for determining the net investment
factor, (6) to change the names of the Separate Account or of the
Subaccounts. In no event will the changes described above be made without
notice to Policy Owners in accordance with the 1940 Act.
LEGAL MATTERS
There are no legal proceedings pending to which the Separate Account is a
party.
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 Commission. The
omitted information may be obtained from the Commission's principal office in
Washington, D.C., upon payment of the Commission's prescribed fees.
APPENDIX A
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MORE INFORMATION ABOUT THE
GENERAL ACCOUNT
Because of exemption and exclusionary provisions in the securities laws,
interests in the General Account are not generally subject to regulation
under the provisions of the Securities Act of 1933 or the Investment Company
Act of 1940. Disclosures regarding the fixed portion of the annuity contract
and the General Account may be subject to the provisions of the Securities
Act of 1933 concerning the accuracy and completeness of statements made in
the Prospectus. The disclosures in this APPENDIX A have not been reviewed by
the Securities and Exchange Commission.
The General Account of the Company is made up of all of the general assets of
the Company other than those allocated to any Separate Account. Allocations
to the General Account become part of the assets of the Company and are used
to support insurance and annuity obligations.
A portion or all of net purchase payments may be allocated 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.
Under the Policies, the minimum interest which may be credited on amounts
allocated to the General Account is 3% compounded annually. Additional
"Excess Interest" may or may not be credited at the sole discretion of the
Company.
If a Policy is surrendered, or if an Excess Amount is redeemed, while the
Policy is in force and before the Annuity Date, a contingent deferred sales
charge is imposed if such event occurs before the payments attributable to
the surrender or withdrawal have been credited to the Policy less than seven
full policy years.
The amount of the death benefit, the amount payable on a full surrender and
the amount applied to provide an annuity on the Annuity Date will be reduced
to reflect any outstanding loan balance (plus accrued interest thereon).
Partial withdrawals may be restricted by the maximum loan limitation.
APPENDIX B
EXCHANGE OFFER
A. VARIABLE CONTRACT EXCHANGE OFFER.
The Company reserves the right to suspend this exchange offer at any time.
This exchange offer applies to all variable annuity contracts issued by the
Company and its indirect wholly owned subsidiary, Allmerica Financial Life
Insurance and Annuity Company ("Allmerica Financial Life") except for
contracts A3018-94 and A3021-93 issued by the Company and contracts A3021-93
and A3018-91 issued by Allmerica Financial (and state variation forms
thereof, which together include all contracts sold as ExecAnnuity Plus). A
variable annuity contract to which this exchange offer applies may be
exchanged at net asset value for the Policy described in this Prospectus. To
effect an exchange, the Company should receive (1) a completed application
for the Policy, (2) written request for the exchange, (3) the contract to be
exchanged for the Policy, and (4) a signed Letter of Awareness.
CONTINGENT DEFERRED SALES CHARGE COMPUTATION. No surrender charge applicable
to the contracts to be exchanged will apply to the surrender effecting the
exchange. Where a contract, other than a Policy or variable annuity contracts
A3020-94 and A3020-92 and state variations thereof ("contract A3020"), is
exchanged for a Policy, the contingent deferred sales charge under the
acquired Policy will be computed as if prior purchase payments for the
exchanged contract had been made for the acquired Policy on the date of issue
of the exchanged contract. Where another Policy or contract A3020 is
exchanged for a new Policy, the contingent deferred sales charge under the
acquired Policy will be computed as if prior purchase payments for the
exchanged Policy or contract A3020 had been made for the acquired Policy at
least as early as the date on which they were made for the exchanged Policy
or contract A3020. For those exchanged contracts for which a front-end sales
charge was deducted from each purchase payment, the transferred accumulated
values will be treated as "Old Payments" under the Policy, so that no
deferred sales charge will be assessed on aggregate subsequent withdrawals
from the Policy of up to the amount of the transferred accumulated values.
For additional purchase payments made under the Policy after the transfer of
accumulated value from the exchanged contract, the contingent deferred sales
charge will be computed based on the number of years that the additional
purchase payments to which the withdrawal is attributed have been credited
under the Policy, as provided in this Prospectus.
SUMMARY OF DIFFERENCES BETWEEN THE POLICY AND EXCHANGED CONTRACTS. The Policy
and the variable contracts to which this exchange offer applies, if other
than another Policy or contract A3020, differ substantially as summarized
below. There may be additional differences important to a person considering
an exchange, and the prospectuses of the Policy and the variable contract to
be exchanged should be reviewed carefully before the exchange is made.
CONTINGENT DEFERRED SALES CHARGE. Except for A3019-91 and A3019-94, which
have the same charge, the contingent deferred sales charge under the Policy,
as described in this Prospectus, imposes higher charge percentages against
the excess amount redeemed and generally applies such percentages for a
greater number of years than the exchanged contracts. For certain classes of
exchanged contracts, new purchase payments, subject to the contingent
deferred sales charge under the Policy, would not have been subject to the
charge under the exchanged contract.
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POLICY FEE AND ADMINISTRATIVE EXPENSE CHARGE. Under the Policy, the Company
deducts a Policy Fee, at a maximum of $30, on each policy anniversary date
and upon full surrender, when the Accumulated Value is $50,000 or less, and
assesses each Subaccount with a daily administrative expense charge at an
annual rate of 0.15% of the average daily net assets of the Subaccount.
Depending on the class of contracts to which this exchange offer is made,
either no policy fee is deducted or a policy fee of $9 is deducted twice a
year. For certain classes of contracts, a combined sales and administrative
expense is deducted from purchase payments. No administrative expense charge
based on a percentage of Subaccount assets is imposed under the contracts to
which this exchange offer is made.
TRANSFER CHARGE. No charges for transfers among the Subaccounts and the
General Account are imposed for contracts to which this exchange offer is
made. Currently, no such charge is imposed under the Policy and the first
twelve transfers in a Policy year are guaranteed to be free of any charge.
However, the Company reserves the right to assess a charge, guaranteed never
to exceed $25, for the seventh and each subsequent transfer in a Policy year.
DEATH BENEFIT. The Policy offers a "stepped-up death benefit" which is not
offered under the exchanged contract; namely, the minimum death benefit that
would have been payable on the most recent fifth year Policy Anniversary for
new Policies, reduced proportionally by withdrawals (in the same proportion
that the Accumulated Value was reduced by a withdrawal), or seventh Policy
Anniversary for original Policies, increased for subsequent purchase payments
and reduced by withdrawals after that date. Upon exchange for the Policy, the
accumulated value of the exchanged contract becomes the "purchase payment"
for the Policy. Therefore, the prior purchase payments made for the exchanged
contract would not become a basis for determining the gross payment (less
redemptions) guarantee under the Policy. Consequently, whether the initial
minimum death benefit under the Policy acquired in an exchange is greater
than, equal to, or less than the death benefit of the exchanged contract
depends upon whether the accumulated value transferred to the Policy is
greater than, equal to, or less than the gross payments (less redemptions)
under the exchanged contract.
ANNUITY TABLES. The contracts to which this
exchange offer is made contain more favorable annuity tables than the Policy
for use in determining the amount of the first variable annuity payment under
the annuity options offered. The contracts and the Policy each provide
minimum guarantees.
INVESTMENTS. Accumulated Value and purchase payments under the Policy may be
allocated to several underlying funds in addition to those permitted under
the exchanged contracts.
SUMMARY OF DIFFERENCES BETWEEN THE POLICY AND CONTRACT A3020. The Policy and
contract A3020 differ in the following material ways (the prospectuses of the
Policy and contract A3020 should be reviewed carefully before any exchange):
CONTINGENT DEFERRED SALES CHARGE. The contingent deferred sales charge under
the Policy, as described in this Prospectus, imposes higher charge
percentages against the excess amount redeemed.
DEATH BENEFIT. The Policy offers a "stepped-up death benefit," which is the
minimum death benefit that would have been payable on the most recent fifth
year Policy Anniversary for new Policies, reduced proportionally by
withdrawals (in the same proportion that the Accumulated Value was reduced by
a withdrawal), or seventh year Policy Anniversary for original Policies,
increased for subsequent purchase payments and reduced by withdrawals after
that date. Under contract A3020, the stepped-up death benefit applies to the
most recent fifth year. Upon exchange for the Policy, the accumulated value
of exchanged contract A3020 becomes the "purchase payment" for the Policy.
Therefore, the prior purchase payments made for exchanged contract A3020
would not become a basis for determining the gross payment (less redemptions)
guarantee under the Policy. Consequently, whether the initial minimum death
benefit under the Policy acquired in an exchange is greater than, equal to,
or less than the death benefit of exchanged contract A3020 depends upon
whether the accumulated value transferred to the Policy is greater than,
equal to, or less than the gross payments (less redemptions) under exchanged
contract A3020.
INVESTMENTS. Accumulated Value and purchase payments under the Policy and
contract A3020 are allocable to different underlying funds and underlying
investment companies.
FIXED ACCOUNT. The Policy has a Fixed Account minimum guaranteed interest
rate of 3% compounded annually. Contract A3020 has a fixed account minimum
guaranteed interest rate of 3.5% compounded annually. Under contract A3020,
amounts may not be transferred from the fixed account to a Sub-Account prior
to the end of the applicable one-year guaranteed period.
B. FIXED ANNUITY EXCHANGE OFFER.
This exchange offer also applies to all fixed annuity contracts issued by
Allmerica Financial Life. A fixed annuity contract to which this exchange
offer applies may be exchanged at net asset value for the Policy described in
this Prospectus, subject to the same provisions for effecting the exchange
and for applying the Policy's contingent deferred sales charge as described
above for variable annuity contracts. This Prospectus should be read
carefully before making such exchange. Unlike a fixed annuity, the Policy's
value is not guaranteed and will vary depending on the investment
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performance of the underlying funds to which it is allocated. The Policy has
a different charge structure than a fixed annuity contract, which includes
not only a contingent deferred sales charge that may vary from that of the
class of contracts to which the exchanged fixed contract belongs, but also
Policy fees, mortality and expense risk charges (for the Company's assumption
of certain mortality and expense risks), administrative expense charges,
transfer charges (for transfers permitted among Subaccounts and the General
Account), and expenses incurred by the underlying funds. Additionally, the
interest rates offered under the General Account of the Policy and the
Annuity Tables for determining minimum annuity payments may be different from
those offered under the exchanged fixed contract.
C. EXERCISE OF "FREE-LOOK PROVISION" AFTER ANY EXCHANGE.
Persons who, under the terms of this exchange offer, exchange their contract
for the Policy and subsequently revoke the Policy within the time permitted,
as described in the sections of this Prospectus captioned "RIGHT TO REVOKE OR
SURRENDER," will have their exchanged contract automatically reinstated as of
the date of revocation. The refunded amount will be applied as the new
current accumulated value under the reinstated contract, which may be more or
less than it would have been had no exchange and reinstatement occurred. The
refunded amount will be allocated initially among the general account and
subaccounts of the reinstated contract in the same proportion that the value
in the general account and the value in each subaccount bore to the
transferred accumulated value on the date of the exchange of the contract for
the Policy. For purposes of calculating any contingent deferred sales charge
under the reinstated contract, the reinstated contract will be deemed to have
been issued and to have received past purchase payments as if there had been
no exchange.
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FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
DEFERRED COMBINATION VARIABLE AND FIXED ANNUITY CONTRACTS
FUNDED THROUGH SUB-ACCOUNTS OF
SEPARATE ACCOUNT VA-K INVESTING IN SHARES OF
DELAWARE GROUP PREMIUM FUND, INC.
This prospectus describes interests under flexible payment deferred combination
variable and fixed annuity contracts issued either on a group basis or as
individual contracts by First Allmerica Financial Life Insurance Company
("Company") to individuals and businesses in connection with retirement plans
which may or may not qualify for special federal income tax treatment. (For
information about the tax status when used with a particular type of plan, see
"FEDERAL TAX CONSIDERATIONS.") Participation in a group contract will be
accounted for by the issuance of a certificate describing the individual's
interest under the group contract. Participation in an individual contract will
be evidenced by the issuance of an individual contract. Certificates and
individual contracts are collectively referred to herein as the "Contracts." The
following is a summary of information about these Contracts. More detailed
information can be found under the referenced captions in this Prospectus.
Contract values may accumulate on a variable basis in the contract's Variable
Account, known as Separate Account VA-K. The Assets of the Variable Account are
divided into Sub-Accounts, each investing exclusively in shares of an underlying
mutual fund.
In most jurisdictions, values may also be allocated on a fixed basis to the
Fixed Account, which is part of the Company's General Account and during the
accumulation period to one or more of the Guarantee Period Accounts. Amounts
allocated to the Fixed Account earn interest at a guaranteed rate for one year
from the date allocated. Amounts allocated to a Guarantee Period Account earn a
fixed rate of interest for the duration of the applicable Guarantee Period. The
interest earned in a Guarantee Period Account is guaranteed if held for the
entire Guarantee Period. If removed prior to the end of the Guarantee Period the
value may be increased or decreased by a Market Value Adjustment. Assets
supporting allocations to the Guarantee Period Accounts in the accumulation
phase are held in the Company's Separate Account GPA.
Certain additional information about the Contracts is contained in a Statement
of Additional Information, dated July 8, 1996 as may be amended from time to
time, which has been filed with the Securities and Exchange Commission and is
incorporated herein by reference. The Table of Contents for the Statement of
Additional Information is listed on page 3 of this Prospectus. The Statement of
Additional Information is available upon request and without charge. To obtain
the Statement of Additional Information, fill out and return the attached
request card or contact Annuity Customer Services, Allmerica Financial Life
Insurance and Annuity Company, 440 Lincoln Street, Worcester, Massachusetts
01653 1-800-533-2124.
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY A CURRENT PROSPECTUS OF
DELAWARE GROUP PREMIUM FUND, INC. INVESTORS SHOULD RETAIN A COPY OF THIS
PROSPECTUS FOR FUTURE REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE CONTRACTS ARE OBLIGATIONS OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE
COMPANY AND ARE DISTRIBUTED BY ALLMERICA INVESTMENTS, INC. THE CONTRACTS ARE
NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK OR
CREDIT UNION. THE CONTRACTS ARE NOT INSURED BY THE U.S. GOVERNMENT, THE
FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC), OR ANY OTHER FEDERAL
AGENCY. INVESTMENTS IN THE CONTRACTS ARE SUBJECT TO VARIOUS RISKS,
INCLUDING THE FLUCTUATION OF VALUE AND POSSIBLE LOSS OF PRINCIPAL.
DATED JULY 8, 1996
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C><C> <C>
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION........ 3
SPECIAL TERMS....................................................... 4
SUMMARY............................................................. 5
ANNUAL AND TRANSACTION EXPENSES..................................... 8
CONDENSED FINANCIAL INFORMATION..................................... 11
PERFORMANCE INFORMATION............................................. 12
WHAT IS AN ANNUITY?................................................. 14
RIGHT TO REVOKE OR SURRENDER........................................ 14
DESCRIPTION OF THE COMPANY, THE VARIABLE ACCOUNT, AND DELAWARE GROUP
PREMIUM FUND, INC.................................................. 15
VOTING RIGHTS....................................................... 18
CHARGES AND DEDUCTIONS.............................................. 18
A. Annual Charge Against Variable Account Assets............... 18
B. Contract Fee................................................ 19
C. Premium Taxes............................................... 19
D. Contingent Deferred Sales Charge............................ 20
E. Transfer Charge............................................. 23
DESCRIPTION OF THE CONTRACT......................................... 24
A. Payments.................................................... 24
B. Transfer Privilege.......................................... 25
C. Surrender................................................... 25
D. Withdrawals................................................. 26
E. Death Benefit............................................... 27
F. The Spouse of the Contract Owner as Beneficiary............. 27
G. Assignment.................................................. 28
H. Electing the Form of Annuity and Annuity Date............... 28
I. Description of Variable Annuity Options..................... 29
J. Norris Decision............................................. 30
K. Computation of Contract Values and Annuity Benefit 30
Payments...................................................
GUARANTEE PERIOD ACCOUNTS........................................... 32
FEDERAL TAX CONSIDERATIONS.......................................... 34
A. Qualified and Non-Qualified Contracts....................... 34
B. Taxation of the Contracts in General........................ 34
C. Tax Withholding and Penalties............................... 35
D. Provisions Applicable to Qualified Employer Plans........... 36
E. Qualified Employee Pension and Profit Sharing Trusts and 36
Qualified Annuity Plans....................................
F. Self-Employed Individuals................................... 36
G. Individual Retirement Account Plans......................... 36
H. Simplified Employee Pensions................................ 37
I. Public School Systems and Certain Tax-Exempt 38
Organizations..............................................
J. Texas Optional Retirement Program........................... 38
K. Section 457 Plans for State Governments and Tax-Exempt 38
Entities...................................................
L. Non-individual Owners....................................... 38
REPORTS............................................................. 39
</TABLE>
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<TABLE>
<S> <C><C> <C>
LOANS (QUALIFIED CONTRACTS ONLY).................................... 39
CHANGES IN OPERATIONS OF THE VARIABLE ACCOUNT....................... 39
LEGAL MATTERS....................................................... 39
FURTHER INFORMATION................................................. 39
APPENDIX A -- MORE INFORMATION ABOUT THE FIXED ACCOUNT.............. 40
APPENDIX B -- SURRENDER CHARGES AND THE MARKET VALUE ADJUSTMENT..... 41
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
GENERAL INFORMATION AND HISTORY..................................... 2
TAXATION OF THE VARIABLE ACCOUNT AND THE COMPANY.................... 2
SERVICES............................................................ 3
UNDERWRITERS........................................................ 3
ANNUITY PAYMENTS.................................................... 4
PERFORMANCE INFORMATION............................................. 5
FINANCIAL STATEMENTS................................................ 8
</TABLE>
THE CONTRACTS OFFERED BY THIS PROSPECTUS MAY NOT BE AVAILABLE IN ALL STATES.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO BUY SECURITIES IN ANY STATE TO ANY PERSON TO WHOM IT IS UNLAWFUL TO
MAKE OR SOLICIT AN OFFER IN THAT STATE.
3
<PAGE>
SPECIAL TERMS
ACCUMULATED VALUE: the sum of the value of all Accumulation Units in the
Sub-Accounts and of the value of all accumulations in the Fixed Account and
Guarantee Period Accounts then credited to the Contract, on any date before the
Annuity Date.
ACCUMULATION UNIT: a measure of the Contract Owner's interest in a Sub-Account
before annuity benefit payments begin.
ANNUITANT: the person designated in the Contract upon whose life annuity
benefit payments are to be made.
ANNUITY DATE: the date on which annuity benefit payments begin.
ANNUITY UNIT: a measure of the value of the periodic annuity benefit payments
under the Contract.
FIXED ACCOUNT: the part of the Company's General Account that guarantees
principal and a fixed interest rate and to which all or a portion of a payment
or transfer under this Contract may be allocated.
FIXED AMOUNT ANNUITY: an Annuity providing for annuity benefit payments which
remain fixed in an amount throughout the annuity benefit payment period
selected.
GUARANTEED INTEREST RATE: the annual effective rate of interest after daily
compounding credited to a Guarantee Period Account.
GUARANTEE PERIOD: the number of years that a Guaranteed Interest Rate is
credited.
GUARANTEE PERIOD ACCOUNT: an account which corresponds to a Guaranteed Interest
Rate for a specified Guarantee Period and is supported by assets in a
non-unitized separate account.
GENERAL ACCOUNT: all the assets of the Company other than those held in a
Separate Account.
MARKET VALUE ADJUSTMENT: a positive or negative adjustment assessed if any
portion of a Guarantee Period Account is withdrawn or transferred prior to the
end of its Guarantee Period.
SUB-ACCOUNT: a subdivision of the Variable Account. Each Sub-Account available
under the Contracts invests exclusively in the shares of a corresponding series
of Delaware Group Premium Fund, Inc.
SURRENDER VALUE: the Accumulated Value of the Contract on full surrender after
application of any Contract fee, contingent deferred sales charge, and Market
Value Adjustment.
UNDERLYING FUNDS: the Equity/Income Series, High Yield Series, Capital Reserves
Series, Money Market Series, Growth Series, Multiple Strategy Series, Value
Series, Emerging Growth Series, the International Equity Series, and the Global
Bond Series of Delaware Group Premium Fund, Inc.
UNDERLYING INVESTMENT COMPANY: Delaware Group Premium Fund, Inc.
VALUATION DATE: a day on which the net asset value of the shares of any of the
Underlying Funds is determined and unit values of the Sub-Accounts are
determined. Valuation dates currently occur on each day on which the New York
Stock Exchange is open for trading, and on such other days (other than a day
during which no payment, withdrawal, or surrender of a Contract was received)
when there is a sufficient degree of trading in an Underlying Fund's portfolio
securities such that the current net asset value of the Sub-Accounts may be
materially affected.
VARIABLE ACCOUNT: Separate Account VA-K, one of the Company's Separate
Accounts, consisting of assets segregated from other assets of the Company. The
investment performance of the assets of the Variable Account is determined
separately from the other assets of the Company and are not chargeable with
liabilities arising out of any other business which the Company may conduct.
VARIABLE ANNUITY: an Annuity providing for payments varying in amount in
accordance with the investment experience of certain Underlying Funds.
4
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SUMMARY
INVESTMENT OPTIONS.
The Contract permits net payments to be allocated among the Sub-Accounts, the
Guarantee Period Accounts and the Fixed Account. THE FIXED ACCOUNT AND/OR THE
GUARANTEE PERIOD ACCOUNTS MAY NOT BE AVAILABLE IN ALL STATES. SIMILARLY, NOT ALL
SUB-ACCOUNTS MAY BE AVAILABLE IN ALL STATES.
SUB-ACCOUNTS -- The Sub-Accounts are subdivisions of the Variable Account,
established as the Company's Separate Account VA-K. The Variable Account is
registered as a unit investment trust under the Investment Company Act of 1940,
as amended, (the "1940 Act") but such registration does not involve the
supervision of the management or investment practices or contracts of Variable
Account by the Securities and Exchange Commission (the "SEC").
Each Sub-Account available under the Contract invests its assets without sales
charge in a corresponding investment series of the Delaware Group Premium Fund,
Inc. ("DGPF"). DGPF is an open-end, diversified series investment company. The
Fund consists of ten different series: the Equity/ Income Series, High Yield
Series, Capital Reserves Series, Money Market Series, Growth Series, Multiple
Strategy Series, Value Series, Emerging Growth Series, International Equity
Series, and Global Bond Series ("Underlying Funds"). Each Underlying Fund
operates pursuant to different investment objectives, discussed below.
INVESTMENT IN THE SUB-ACCOUNT. The value of each Sub-Account will vary daily
depending on the performance of the investments made by the respective
Underlying Funds. There can be no assurance that the investment objectives of
the Underlying Funds can be achieved or that the value of a Contract will equal
or exceed the aggregate amount of the purchase payments made under the Contract.
For more information about the Variable Account, the Company and the investments
of the Underlying Funds, see "DESCRIPTION OF THE COMPANY, THE VARIABLE ACCOUNT
AND DELAWARE GROUP PREMIUM FUND, INC." The accompanying prospectuses of DGPF
describe the investment objectives and risks of each of the Underlying Funds.
Dividends or capital gains distributions received from an Underlying Fund are
reinvested in additional shares of that Underlying Fund, which are retained as
assets of the Sub-Account.
GUARANTEE PERIOD ACCOUNTS -- Assets supporting the guarantees under the
Guarantee Period Accounts are held in the Company's Separate Account GPA, a
non-unitized insulated separate account. However, values and benefits calculated
on the basis of Guarantee Period Account allocations are obligations of the
Company's General Account. Amounts allocated to a Guarantee Period Account earn
a Guaranteed Interest Rate declared by the Company. The level of the Guaranteed
Interest Rate depends on the number of years of the Guarantee Period selected.
The Company currently makes available seven Guarantee Periods ranging from three
to ten years in duration (excluding a four year Guarantee Period). Once
declared, the Guaranteed Interest Rate will not change during the duration of
the Guarantee Period. If amounts allocated to a Guarantee Period Account are
transferred, surrendered or applied to an annuity option at any time other than
the day following the last day of the applicable Guarantee Period, a Market
Value Adjustment will apply that may increase or decrease the account's value.
For more information about the Guarantee Period Accounts and the Market Value
Adjustment, see "GUARANTEE PERIOD ACCOUNTS."
FIXED ACCOUNT -- The Fixed Account is part of the General Account which consists
of all the Company's assets other than those allocated to the Variable Account
and any other separate account. Allocations to the Fixed Account are guaranteed
as to principal and minimum rate of interest. Additional excess interest may be
declared periodically at the Company's discretion. Furthermore, the initial rate
in effect on the date an amount is allocated to the Fixed Account will be
guaranteed for one year from that date. For more information about the Fixed
Account see Appendix A, "MORE INFORMATION ABOUT THE FIXED ACCOUNT."
5
<PAGE>
TRANSFERS AMONG ACCOUNTS. Prior to the Annuity Date, the Contracts permit
amounts to be transferred among and between the Sub-Accounts, the Guarantee
Period Accounts and the Fixed Account, subject to certain limitations described
under "Transfer Privilege."
ANNUITY BENEFIT PAYMENTS. The owner of a Contract ("Contract Owner") may select
variable annuity benefit payments based on one or more of certain Sub-Accounts,
fixed-amount annuity benefit payments, or a combination of fixed-amount and
variable annuity benefit payments. Fixed-amount annuity benefit payments are
guaranteed by the Company.
See "DESCRIPTION OF CONTRACT" for information about annuity benefit payment
options, selecting the Annuity Date, and how annuity benefit payments are
calculated.
REVOCATION RIGHTS. An individual purchasing a Contract intended to qualify as
an Individual Retirement Annuity ("IRA") may revoke the Contract within 10 days
after receipt of the Contract. In certain states Contract Owners may have
special revocation rights. For more information about revocation rights, see
"RIGHT TO REVOKE OR SURRENDER."
PAYMENT MINIMUMS AND MAXIMUMS. Under the Contracts, payments are not limited as
to frequency and number, but no payments may be submitted within one month of
the Annuity Date. Generally, the initial payment must be at least $600 ($1,000
in Washington) and subsequent payments must be at least $50. Under a monthly
automatic payment plan or a payroll deduction plan, each payment must be at
least $50. However, in cases where the contribution on behalf of an employee
under an employer-sponsored retirement plan is less than $600 but more than $300
annually, the Company may issue a Contract on the employee, if the plan's
average annual contribution per eligible plan participant is at least $600.
The Company reserves the right to set maximum limits on the aggregate purchase
payments made under the Contract. In addition, the Internal Revenue Code imposes
maximum limits on contributions under qualified annuity plans.
CHARGES AND DEDUCTIONS. For a complete discussion of charges, see "CHARGES AND
DEDUCTIONS."
A. CONTINGENT DEFERRED SALES CHARGE.
No sales charge is deducted from payments at the time they are made. However,
depending on the length of time that the payments to which the withdrawal is
attributed have remained credited under the Contract a contingent deferred sales
charge of up to 7% may be assessed for a surrender, withdrawal, or election of
an annuity for a commutable period certain option or any period certain option
for less than 10 years.
B. ANNUAL CONTRACT FEE.
A $30 Contract Fee will be deducted from the Accumulated Value under the
Contract for administrative expense on the Contract anniversary, or upon full
surrender of the Contract during the year, when the Accumulated Value is $50,000
or less. The Contract Fee is waived for Contracts issued to and maintained by
the trustee of a 401(k) plan.
C. PREMIUM TAXES.
A deduction for State and local premium taxes, if any, may be made as described
under "Premium Taxes."
D. VARIABLE ACCOUNT ASSET CHARGES.
A daily charge, equivalent to 1.25% per annum, is made on the value of each
Sub-Account at each Valuation Date. The charge is retained for the mortality and
expense risks the Company assumes. In addition, to cover administrative
expenses, the Company deducts a daily charge of 0.15% per annum of the value of
the average net assets in the Sub-Accounts.
6
<PAGE>
E. TRANSFER CHARGE.
The Company currently makes no charge to process transfers. The Company
guarantees that the first twelve transfers in a Contract year will be free of
any transfer charge. For each subsequent transfer the Company reserves the right
to assess a charge, guaranteed never to exceed $25, to reimburse the Company for
the cost of processing the transfer.
F. CHARGES OF THE UNDERLYING FUNDS.
In addition to the charges described above, certain fees and expenses are
deducted from the assets of the Underlying Funds. These charges vary among the
Underlying Funds.
SURRENDER OR WITHDRAWAL. At any time before the Annuity Date, the Contract
Owner has the right either to surrender the Contract in full and receive its
current value, minus the Contract Fee and any applicable contingent deferred
sales charge, and adjusted for any positive or negative Market Value Adjustment
or to withdraw a portion of the Contract's value subject to certain limits and
any applicable contingent deferred sales charge and/or Market Value Adjustment.
There may be tax consequences for surrender or withdrawals. For further
information, see "Surrender" and "Withdrawal," "Contingent Deferred Sales
Charge," and "FEDERAL TAX CONSIDERATIONS."
DEATH BENEFIT. If the Annuitant, Contract Owner or Joint Owner should die
before the Annuity Date, a death benefit will be paid to the beneficiary. Upon
death of the Annuitant (or an Owner if that Owner is also the Annuitant), the
death benefit is equal to the greatest of (a) the Accumulated Value increased by
any positive Market Value Adjustment; (b) gross payments, reduced
proportionately to reflect withdrawals (for each withdrawal the proportionate
reduction is calculated as the death benefit under this option immediately prior
to the withdrawal multiplied by the withdrawal amount and divided by the
Accumulated Value immediately prior to the withdrawal); or (c) the death benefit
that would have been payable on the most recent Contract Anniversary, increased
for subsequent purchase payments and reduced proportionately to reflect
withdrawals after that date. If an Owner who is not also the Annuitant dies
prior to annuitization, the death benefit will equal the Accumulated Value of
the Contract increased by any positive Market Value Adjustment determined
following receipt of due proof of death at the Principal Office. If the
Annuitant dies after the Annuity Date but before all guaranteed annuity benefit
payments have been made, the remaining payments will be paid to the beneficiary
at least as rapidly as under the annuity option in effect. See "Death Benefit."
SALES OF CONTRACTS. The Contracts are sold by agents of the Company who are
authorized by applicable state law to sell variable annuity Contracts. These
agents are registered representatives of registered broker-dealers which are
members of the National Association of Securities Dealers, Inc., and whose
representatives are authorized by applicable law to sell variable annuity
Contracts. See "Sales Expense."
7
<PAGE>
ANNUAL AND TRANSACTION EXPENSES
The purpose of the following tables is to assist the Contract Owner in
understanding the various costs and expenses that a Contract Owner will bear
directly or indirectly under the Contracts. The tables reflect charges under the
Contracts, expenses of the Sub-Accounts, and expenses of the Underlying Series.
In addition to the charges and expenses described below, in some states premium
taxes may be applicable.
<TABLE>
<CAPTION>
CONTRACT YEAR AFTER DATE
OF
CONTRACT OWNER TRANSACTION EXPENSES PURCHASE PAYMENT CHARGE
------------------------ ---------
<S> <C> <C>
CONTINGENT DEFERRED SALES CHARGE:
The charge (as a percentage of payments, 0-1 7%
applied to the amount surrendered in excess 2 6%
of the amount, if any, which may be 3 5%
surrendered free of charge) will be assessed 4 4%
upon surrender, withdrawal, or annuitization 5 3%
under any commutable period certain option or 6 2%
a noncommutable period certain less than 10 7 1%
years. more than 7 0%
TRANSFER CHARGE:
The Company currently makes no charge for None
processing transfers. The Company guarantees
that the first twelve transfers in a Contract
year will be free of a transfer charge. For
the thirteenth and each subsequent transfer,
the Company reserves the right to assess a
charge, guaranteed never to exceed $25, to
reimburse the Company for the costs of
processing the transfer.
ANNUAL CONTRACT FEE:
An annual Contract Fee, equal to $30, is $30
deducted when Accumulated Value is $50,000 or
less. The Contract Fee is currently waived
for Contracts issued to a trustee of a 401(k)
plan, but the Company reserves the right to
impose the Contract Fee on such Contracts.
VARIABLE ACCOUNT ANNUAL EXPENSES:
(as a percentage of average account value)
Mortality and Expense Risk Charge 1.25%
Variable Account Administrative Expense Charge 0.15%
---------
Total Annual Expenses 1.40%
</TABLE>
8
<PAGE>
DELAWARE GROUP PREMIUM FUND, INC.
<TABLE>
<CAPTION>
EQUITY -- HIGH CAPITAL MONEY
SERIES ANNUAL EXPENSES INCOME YIELD RESERVES MARKET GROWTH
- --------------------------------------------------------------- ------------ ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Management Fees................................................ 0.60% 0.60% 0.59% 0.49% 0.70%
Other Series Expenses.......................................... 0.09% 0.09% 0.12% 0.13% 0.10%
Total Series Annual Expenses
(After Expense Reimbursement)................................. 0.69% 0.69% 0.71% 0.62% 0.80%
</TABLE>
<TABLE>
<CAPTION>
MULTIPLE EMERGING INT'L. GLOBAL
SERIES ANNUAL EXPENSES STRATEGY VALUE GROWTH EQUITY BOND
- --------------------------------------------------------------- ------------ ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Management Fees................................................ 0.60% 0.58% 0.58% 0.65% 0.75%
Other Series Expenses.......................................... 0.09% 0.22% 0.22% 0.15% 0.05%*
Total Series Annual Expenses
(After Expense Reimbursement)................................. 0.69% 0.80% 0.80% 0.80% 0.80%
</TABLE>
The investment adviser for the Equity-Income, High Yield, Capital Reserves,
Money Market, Growth, Multiple Strategy, Value and Emerging Growth is Delaware
Management Company, Inc. The Investment Adviser for the International Equity
Series and the Global Bond Series is Delaware International Advisers Ltd. The
investment advisers from the Series of the Fund have agreed voluntarily to waive
their management fees and reimburse each Series to limit certain expenses to
8/10 of 1% of the average daily net assets. This waiver will be in effect
through December 31, 1996. For the fiscal year ended December 31, 1995, before
waiver and/or reimbursement by the investment adviser, total Series expenses as
a percentage of average daily net assets were 0.88% for the Growth Series, 1.41%
for the Value Series, 1.47% for the Emerging Growth Series and 1.01% for the
International Equity Series.
- ------------------------
* Estimated after expense reimbursement
9
<PAGE>
The following examples demonstrate the cumulative expenses which would be paid
by the Contract Owner at 1-year, 3-year, 5-year, and 10-year intervals under
certain contingencies. Each example assumes a $1,000 investment in a Sub-Account
and a 5% annual return on assets. Because the expenses of the Underlying Series
differ, separate examples are used to illustrate the expenses incurred by a
Contract Owner on an investment in the various Sub-Accounts.
THE INFORMATION GIVEN UNDER THE FOLLOWING EXAMPLES SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR
LESSER THAN THOSE SHOWN.
(a) If you surrender your Contract or annuitize* under a commutable period
certain option or a noncommutable period certain option of less than 10 years at
the end of the applicable period, you would pay the following expenses on a
$1,000 investment, assuming 5% annual return on assets:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Equity -- Income............................................ $83 $115 $147 $253
High Yield.................................................. $84 $115 $148 $254
Capital Reserves............................................ $84 $116 $149 $256
Money Market................................................ $83 $114 $145 $248
Growth...................................................... $84 $118 $152 $263
Multiple Strategy........................................... $83 $115 $147 $252
Value....................................................... $84 $118 $152 $263
Emerging Growth............................................. $84 $118 $152 $263
International Equity........................................ $84 $118 $152 $263
Global Bond................................................. $83 $118 $152 $263
</TABLE>
(b) If you annuitize* under a life option or any noncommutable period certain
option of 10 years or more at the end of the applicable time period or if you do
NOT surrender or annuitize your Contract, you would pay the following expenses
on a $1,000 investment, assuming an annual 5% return on assets:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Equity -- Income............................................ $22 $ 69 $118 $253
High Yield.................................................. $22 $ 69 $118 $254
Capital Reserves............................................ $23 $ 70 $119 $256
Money Market................................................ $22 $ 67 $115 $248
Growth...................................................... $23 $ 72 $123 $263
Multiple Strategy........................................... $22 $ 69 $117 $252
Value....................................................... $23 $ 72 $123 $263
Emerging Growth............................................. $23 $ 72 $123 $263
International Equity........................................ $23 $ 72 $123 $263
Global Bond................................................. $23 $ 72 $123 $263
</TABLE>
Pursuant to requirements of the 1940 Act, the Contract Fee has been reflected in
the examples by a method intended to show the "average" impact of the Contract
Fee on an investment in the Variable Account. The total Contract Fees collected
under the Contracts by the Company are divided by the total average net assets
attributable to the Contracts. The resulting percentage is 0.09%, and the amount
of the Contract fee is assumed to be $.90 in the Examples. The Contract Fee is
deducted only when the accumulated value is $50,000 or less.
- ------------------------
* The Contract fee is not deducted after annuitization. No contingent deferred
sales charge is assessed at the time of annuitization in any Contract year
under an option including a life contingency or under any noncommutable
period certain option of 10 years or more.
10
<PAGE>
CONDENSED FINANCIAL INFORMATION
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA-K
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
SUB-ACCOUNT 201
Unit Value:
Beginning of Period........................................................................... 1.006 1.000
End of Period................................................................................. 1,351 1.006
Number of Units Outstanding at End of Period (in thousands)..................................... 670 455
SUB-ACCOUNT 202
Unit Value:
Beginning of Period........................................................................... 0.980 1.000
End of Period................................................................................. 1.116 0.980
Number of Units Outstanding at End of Period (in thousands)..................................... 670 287
SUB-ACCOUNT 203
Unit Value:
Beginning of Period........................................................................... 0.991 1.000
End of Period................................................................................. 1.115 0.991
Number of Units Outstanding at End of Period (in thousands)..................................... 195 181
SUB-ACCOUNT 204
Unit Value:
Beginning of Period........................................................................... 1.018 1.000
End of Period................................................................................. 1.059 1.018
Number of Units Outstanding at End of Period (in thousands)..................................... 126 302
SUB-ACCOUNT 205
Unit Value:
Beginning of Period........................................................................... 1.008 1.000
End of Period................................................................................. 1.008
Number of Units Outstanding at End of Period (in thousands)..................................... 149
SUB-ACCOUNT 206
Unit Value:
Beginning of Period........................................................................... 0.991 1.000
End of Period................................................................................. 1.238 0.991
Number of Units Outstanding at End of Period (in thousands)..................................... 304 173
SUB-ACCOUNT 207
Unit Value:
Beginning of Period........................................................................... 1.004 1.000
End of Period................................................................................. 1.128 1.004
Number of Units Outstanding at End of Period (in thousands)..................................... 358 193
SUB-ACCOUNT 208
Unit Value:
Beginning of Period........................................................................... 1.002 1.000
End of Period................................................................................. 1.223 1.002
Number of Units Outstanding at End of Period (in thousands)..................................... 146 82
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
1995 1994
--------- ---------
SUB-ACCOUNT 209
<S> <C> <C>
Unit Value:
Beginning of Period........................................................................... 1.022 1.000
End of Period................................................................................. 1.404 1.022
Number of Units Outstanding at End of Period (in thousands)..................................... 1.486 790
SUB-ACCOUNT 210
Unit Value:
Beginning of Period........................................................................... 1.000
End of Period................................................................................. 1.000
Number of Units Outstanding at End of Period (in thousands)..................................... 0
</TABLE>
- ------------------------
* The date of inception of Sub-Account 204 was 4/6/94. The date of inception
of Sub-Accounts 205, 206, and 207 was 4/19/94. The date of inception of
Sub-Account 201 was 4/28/94. The date of inception of Sub-Accounts 208 and
209 was 5/10/94. The date of inception of Sub-Account 202 was 5/20/94. The
date of inception of Sub-Account 203 was 6/22/94. The date of inception for
Sub-Account 210 was 4/30/96.
PERFORMANCE INFORMATION
The Contracts were first offered to the public in 1996. However, the Company may
advertise "Total Return" and "Average Total Return" performance information
based on the periods that the Underlying Funds have been in existence. The
results for any period prior to the Contracts being offered will be calculated
as if the Contracts had been offered during that period of time, with all
charges assumed to be those applicable to the Sub-Accounts and the Underlying
Funds. Both the total return and yield figures are based on historical earnings
and are not intended to indicate future performance.
The "total return" of a Sub-Account refers to the total of the income generated
by an investment in the Sub-Account and of the changes in the value of the
principal (due to realized and unrealized capital gains or losses) for a
specified period, reduced by certain charges, and expressed as a percentage of
the investment.
The "yield" of the Sub-Account investing in the Money Market Series refers to
the income generated by an investment in the Sub-Account over a seven-day period
(which period will be specified in the advertisement). This income is then
"annualized" by assuming that the income generated in the specific week is
generated over a 52-week period. This annualized yield is shown as a percentage
of the investment. The "effective yield" calculation is similar, but when
annualized, the income earned by an investment in the Sub-Account is assumed to
be reinvested. Thus the "effective yield" will be slightly higher than the
"yield" because of the compounding effect of this assumed reinvestment.
The total return, yield, and effective yield figures are adjusted to reflect the
Sub-Account's asset charges. The total return figures also reflect the $30
annual Contract Fee and the contingent deferred sales charge which would be
assessed if the investment were completely withdrawn at the end of the specified
period.
The Company may also advertise supplemental total return performance
information. Supplemental total return refers to the total of the income
generated by an investment in the Sub-Account and of the changes of value of the
principal invested (due to realized and unrealized capital gains or losses),
adjusted by the Sub-Accounts annual asset charges, and expressed as a percentage
of the investment. Because it is assumed that the investment is NOT withdrawn at
the end of the specified period, the contingent deferred sales charge is NOT
included in the calculation of supplemental total return.
12
<PAGE>
Performance information for a Sub-Account may be compared, in reports and
promotional literature, to: (i) the Standard & Poor's 500 Stock Index ("S & P
500"), Dow Jones Industrial Average ("DJIA"), Shearson Lehman Aggregate Bond
Index or other unmanaged indices so that investors may compare the Sub-Account
results with those of a group of unmanaged securities widely regarded by
investors as representative of the securities markets in general; (ii) other
groups of variable annuity separate accounts or other investment products
tracked by Lipper Analytical Services, a widely used independent research firm
which ranks mutual funds and other investment products by overall performance,
investment objectives, and assets, or tracked by other services, companies,
publications, or persons, such as 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 in the Sub-Account. Unmanaged indices may assume the reinvestment of
dividends but generally do not reflect deductions for administrative and
management costs and expenses.
Performance information for any Sub-Account reflects only the performance of a
hypothetical investment in the Sub-Account during the particular time period on
which the calculations are based. Performance information should be considered
in light of the investment objectives and policies, characteristics and quality
of the portfolio of the Underlying Series in which the Sub-Account invests and
the market conditions during the given time period, and should not be considered
as a representation of what may be achieved in the future.
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1995
(ASSUMING COMPLETE WITHDRAWAL OF THE INVESTMENT)
<TABLE>
<CAPTION>
TOTAL RETURN
FOR YEAR 10 YEARS OR
ENDED SINCE
UNDERLYING FUND 12/31/95 3 YEARS 5 YEARS INCEPTION
- -------------------------------------------------- ------------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
International Equity.............................. 5.32% 7.16% N/A 7.06%
Value............................................. 15.15% N/A N/A 6.93%
Emerging Growth................................... 30.32% N/A N/A 13.43%
Growth............................................ 20.77% 8.22% N/A 8.97%
Multiple Strategy................................. 17.85% 7.49% N/A 10.47%
Equity -- Income.................................. 27.27% 12.78% N/A 8.35%
High Yield........................................ 6.92% 5.74% N/A 8.29%
Capital Reserves.................................. 5.51% 2.55% N/A 5.65%
Money Market...................................... -2.53% 0.24% N/A 3.68%
Global Bond....................................... N/A N/A N/A N/A
</TABLE>
13
<PAGE>
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1995
(ASSUMING NO WITHDRAWAL OF THE INVESTMENT)
<TABLE>
<CAPTION>
TOTAL RETURN
FOR YEAR 10 YEARS OR
ENDED SINCE
UNDERLYING FUND 12/31/95 3 YEARS 5 YEARS INCEPTION
- -------------------------------------------------- ------------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
International Equity.............................. 12.32% 9.16% N/A 8.66%
Value............................................. 22.15% N/A N/A 10.14%
Emerging Growth................................... 37.32% N/A N/A 16.47%
Growth............................................ 27.77% 10.18% N/A 9.77%
Multiple Strategy................................. 24.85% 9.47% N/A 10.47%
Equity -- Income.................................. 34.27% 14.59% N/A 8.35%
High Yield........................................ 13.92% 7.78% N/A 8.29%
Capital Reserves.................................. 12.51% 4.72% N/A 5.65%
Money Market...................................... 4.03% 2.44% N/A 3.68%
Global Bond....................................... N/A N/A N/A N/A
</TABLE>
The dates of inception of the Underlying Funds are: 7/28/88 for Multiple
Strategy, Equity -- Income, High Yield, Capital Reserves, and Money Market;
7/12/91 for Growth; 1/29/92 for International Equity; 12/27/93 for Emerging
Growth and Value; 4/30/96 for Global Bond.
WHAT IS AN ANNUITY?
In general, an annuity is a contract designed to provide a retirement income in
the form of periodic payments for the lifetime of the Contract Owner or an
individual chosen by the Contract Owner. The retirement income payments are
called "annuity benefit payments" and the individual receiving the payments is
called the "Annuitant." Annuity benefit payments begin on the annuity date.
Under an annuity contract, the insurance company assumes a mortality risk and an
expense risk. The mortality risk arises from the insurance company's guarantee
that annuity benefit payments will continue for the life of the Annuitant,
regardless of how long the Annuitant lives or how long all Annuitants as a group
live. The expense risk arises from the insurance company's guarantee that
charges will not be increased beyond the limits specified in the Contract,
regardless of actual costs of operations.
The Contract Owner's payments, less any applicable deductions, are invested by
the insurance company. After retirement, annuity benefit payments are paid to
the Annuitant for life or for such other period chosen by the Contract Owner. In
the case of a "fixed" annuity, the value of these annuity benefit payments is
guaranteed by the insurance company, which assumes the risk of making the
investments to enable it to make the guaranteed payments. For more information
about fixed annuities see APPENDIX A, "MORE INFORMATION ABOUT THE FIXED
ACCOUNT." With a variable annuity, the value of the Contract and the annuity
benefit payments are not guaranteed but will vary depending on the investment
performance of a portfolio of securities. Any investment gains or losses are
reflected in the value of the Contract and in the annuity benefit payments. If
the portfolio increases in value, the value of the Contract increases. If the
portfolio decreases in value, the value of the Contract decreases.
RIGHT TO REVOKE OR SURRENDER
A Contract Owner may revoke the Contract within 10 days after receipt of the
Contract. In order to revoke the Contract, the Contract Owner must mail or
deliver the Contract to the Principal Office of the Company at 440 Lincoln
Street, Worcester, Massachusetts 01653, or to an agent of the Company. Mailing
or delivery must occur on or before 10 days after receipt of the Contract for
revocation to be
14
<PAGE>
effective. Within seven days, the Company will send the Contract Owner a refund
of the greater of (1) gross payments or (2) the Accumulated Value plus any
amounts deducted under the Contract or by the Underlying Funds for taxes,
charges or fees.
If on the date of revocation the Surrender Value of the Contract exceeds gross
payments, the Company will treat the revocation request as a request for
surrender (see "Surrender") and will pay the Contract Owner the Surrender Value
of the Contract. The liability of the Variable Account under this provision is
limited to the Contract Owner's Accumulated Value in the Variable Account on the
date of cancellation. Any additional amounts refunded to the Contract Owner will
be paid by the Company.
The refund of any premium paid by check may be delayed until the check has
cleared the Contract Owner's bank.
DESCRIPTION OF THE COMPANY, THE VARIABLE ACCOUNT, 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.
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 VARIABLE ACCOUNT -- The Variable Account is a separate investment account of
the Company referred to as Separate Account VA-K. The assets used to fund the
variable portions of the Contracts are set aside in the Sub-Accounts of the
Variable Account, and are kept separate and apart from the general assets of the
Company. There are 18 Sub-Accounts available under the Contracts. Each Sub-
Account is administered and accounted for as part of the general business of the
Company, but the income, capital gains, or capital losses of each Sub-Account
are allocated to such Sub-Account, without regard to other income, capital
gains, or capital losses of the Company. Under Massachusetts law, the assets of
the Variable Account may not be charged with any liabilities arising out of any
other business of the Company.
The Variable Account was authorized by vote of the Board of Directors of the
Company on November 1, 1990. The Variable Account meets the definition of
"separate account" under federal securities law and is registered with the
Securities and Exchange Commission ("Commission") as a unit investment trust
under the Investment Company Act of 1940 ("1940 Act"). The registration of the
Variable Account and the Underlying Investment Companies does not involve the
supervision by the Commission of management or investment practices or Contracts
of the Variable Account, the Company, the DGPF or the Underlying Funds.
THE COMPANY OFFERS OTHER VARIABLE ANNUITY CONTRACTS INVESTING IN THE VARIABLE
ACCOUNT WHICH ARE NOT DISCUSSED IN THIS PROSPECTUS. THE VARIABLE ACCOUNT ALSO
INVESTS IN OTHER UNDERLYING FUNDS WHICH ARE NOT AVAILABLE TO THE CONTRACTS
DESCRIBED IN THIS PROSPECTUS.
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.
15
<PAGE>
DGPF was established to provide a vehicle for the investment of assets of
various separate accounts supporting variable insurance policies. DGPF currently
has ten investment portfolios, each issuing a series of shares: Equity/Income
Series, High Yield Series, Capital Reserves Series, Money Market Series, Growth
Series, Multiple Strategy Series, Value Series, Emerging Growth Series,
International Equity Series, and Global Bond Series (collectively, "Underlying
Funds"). 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 have no
effect on the investment performance of another Underlying Fund. Shares of the
Underlying Funds are not offered to the general public but solely to separate
accounts of life insurance companies.
The investment adviser for the Equity/Income Series, High Yield Series, Capital
Reserves Series, Money Market Series, Growth Series, Multiple Strategy Series,
Value Series, and Emerging Growth Series is Delaware Management Company. Inc.
("Delaware Management"). The investment adviser for the International Equity
Series and the Global Bond Series is Delaware International Advisers Ltd.
("Delaware International").
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 Funds
may be found in the Prospectus of the Funds, which accompanies this Prospectus
and should be read carefully before investing. The Statement of Additional
Information of DGPF is available upon request.
SUB-ACCOUNT 201 -- invests solely in shares of the Equity -- Income Series. The
Equity -- Income Series seeks the highest possible total rate of return by
selecting issues that exhibit the potential for capital appreciation while
providing higher than average dividend income.
SUB-ACCOUNT 202 -- invests solely in shares of the High Yield Series. The High
Yield Series seeks as high a current income as possible by investing in rated
and unrated corporate bonds (including high-yield bonds commonly known as junk
bonds), U.S. Government securities and commercial paper. Please read the Fund's
prospectus disclosure regarding the risk factors before investing in this
Series.
SUB-ACCOUNT 203 -- invests solely in shares of the Capital Reserves Series. The
Capital Reserves Series seeks a high stable level of current income while
minimizing fluctuations in principal by investing in a diversified portfolio of
short and intermediate-term securities.
SUB-ACCOUNT 204 -- invests solely in shares of the Money Market Series. The
Money Market Series seeks the highest level of income consistent with the
preservation of capital and liquidity through investments in short-term money
market instruments.
SUB-ACCOUNT 205 -- invests solely in shares of the Growth Series. The Growth
Series seeks long-term capital appreciation by investing its assets in a
diversified portfolio of securities exhibiting the potential for significant
growth.
SUB-ACCOUNT 206 -- invests solely in shares of the Multiple Strategy Series. The
Multiple Strategy Series seeks a balance of capital appreciation, income and
preservation of capital. It uses a dividend-oriented valuation strategy to
select securities issued by established companies that are believed to
demonstrate potential for income and capital growth.
SUB-ACCOUNT 207 -- invests solely in shares of the International Equity Series.
The International Series 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.
SUB-ACCOUNT 208 -- invests solely in shares of the Value Series. The Value
Series seeks capital appreciation by investing in small to mid-cap common stocks
whose market value appears low relative to their underlying value or future
earnings and growth potential. Emphasis will also be placed on securities of
companies that may be temporarily out of favor or whose value is not yet
recognized by the market.
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SUB-ACCOUNT 209 -- invests solely in shares of the Emerging Growth Series. The
Emerging Growth Series seeks long-term capital appreciation by investing
primarily in small-cap common stocks and convertible securities of emerging and
other growth-oriented companies. These securities will have been judged to be
responsive to changes in the market place and to have fundamental
characteristics to support growth. Income is not an objective.
SUB-ACCOUNT 210 -- invests solely in shares of the Global Bond Series. The
Global Bond Series seeks current income consistent with preservation of
principal by investing primarily in fixed income securities that may also
provide the potential for capital appreciation. At least 65% of the series'
assets will be invested in fixed income securities of issuers organized or
having a majority of their assets in or deriving a majority of the operating
income in at least three different countries, one of which may be the United
States.
There is no assurance that the investment objectives of the Underlying Funds
will be met.
In the event of a material change in the investment policy of a Sub-Account or
the Underlying Series in which it invests, you will be notified of the change.
No material changes in the investment policy of the Variable Account or any
Sub-Accounts will be made without approval pursuant to the applicable state
insurance laws. If you have Contract 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 (1) the effective date of such change in the
investment policy or (2) the receipt of the notice of your right to transfer.
INVESTMENT ADVISORY SERVICES TO DGPF. -- For managing the portfolios of the
Underlying Funds and making the investment decisions, each investment adviser is
paid an annual fee by their respective Underlying Funds. For Delaware
Management, this fee is equal to 5/10 of 1% of the average daily net assets of
the Money Market Series, 3/4 of 1% of the average daily net assets of the Growth
Series, Value Series and Emerging Growth Series, and 6/10 of 1% of the average
daily net assets of the Equity-Income Series, High Yield Series, Capital Reserve
Series, Multiple Strategy Series. For Delaware International, this fee is equal
to 3/4 of 1% of the average daily net assets of the International Equity Series
and of the Global Bond Series.
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
Variable Account or the affected Sub-Account, the Company may withdraw the
shares of that Underlying Fund and substitute shares of another registered
open-end management company. The Company will not substitute any shares
attributable to a Contract interest in a Sub-Account without notice to the
Contract Owner and prior approval of the Commission and state insurance
authorities, to the extent required by the 1940 Act or other applicable law. The
Variable Account may, to the extent permitted by law, purchase other securities
for other contracts or permit a conversion between contracts upon request by a
Contract Owner.
The Company also reserves the right to establish additional Sub-Accounts of the
Variable Account, each of which would invest in shares corresponding to a new
Underlying Fund or in shares of another investment company having a specified
investment objective. Subject to applicable law and any required 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 Contract Owners on a basis to be determined by the Company.
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Shares of the Underlying Funds are also issued to other unaffiliated insurance
companies ("shared funding") which issue variable annuities and variable life
Contracts ("mixed funding"). It is conceivable that in the future such mixed
funding or shared funding may be disadvantageous for variable life Contract
Owners or variable annuity Contract Owners. Although the Company and the DGPF do
not currently foresee any such disadvantages to either variable life insurance
Contract Owners or variable annuity Contract Owners, the Company and DGPF intend
to monitor events in order to identify any material conflicts between such
Contract Owners and to determine what action, if any, should be taken in
response thereto. If it were concluded 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 Contract to reflect the substitution or
change and will notify Contract Owners of all such changes. If the Company deems
it to be in the best interest of Contract Owners, and subject to any approvals
that may be required under applicable law, the Variable Account or any
Sub-Account(s) may be operated as a management company under the 1940 Act, may
be deregistered under the 1940 Act if registration is no longer required, or may
be combined with other Sub-Accounts or other separate accounts of the Company.
VOTING RIGHTS
The Company will vote Underlying Fund shares held by each Sub-Account in
accordance with instructions received from Contract Owners and, after the
Annuity Date, from the Annuitants. Each person having a voting interest in a
Sub-Account will be provided with proxy materials of the Underlying Fund
together with a form with which to give voting instructions to the Company.
Shares for which no timely instructions are received will be voted in proportion
to the instructions which are received. The Company will also vote shares in a
Sub-Account that it owns and which are not attributable to Contracts in the same
proportion. If the 1940 Act or any rules thereunder should be amended or if the
present interpretation of the 1940 Act or such rules should change, and as a
result the Company determines that it is permitted to vote shares in its own
right, whether or not such shares are attributable to the Contract, the Company
reserves the right to do so.
The number of votes which a Contract Owner or Annuitant may cast will be
determined by the Company as of the record date established by the Underlying
Fund. During the accumulation period, the number of Underlying Fund shares
attributable to each Contract Owner will be determined by dividing the dollar
value of the Accumulation Units of the Sub-Account credited to the Contract by
the net asset value of one Underlying Fund share.
During the annuity period, the number of Underlying Fund shares attributable to
each Annuitant will be determined by dividing the reserve held in each
Sub-Account for the Annuitant's variable annuity by the net asset value of one
Underlying Fund share. Ordinarily, the Annuitant's voting interest in the
Underlying Fund will decrease as the reserve for the variable annuity is
depleted.
CHARGES AND DEDUCTIONS
Deductions under the Contracts and charges against the assets of the
Sub-Accounts are described below. Other deductions and expenses paid out of the
assets of the Underlying Funds are described in the Prospectus and Statement of
Additional Information of DGPF.
A. ANNUAL CHARGES AGAINST VARIABLE ACCOUNT ASSETS.
MORTALITY AND EXPENSE RISK CHARGE -- The Company makes a charge of 1.25% on an
annual basis of the daily value of each Sub-Account's assets to cover the
mortality and expense risk which the Company assumes in relation to the variable
portion of the Contracts. The charge is imposed during both the accumulation
period and the annuity period. The mortality risk arises from the Company's
guarantee that it will make annuity benefit payments in accordance with annuity
rate provisions established at the time the Contract is issued for the life of
the Annuitant (or in accordance with the annuity option
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<PAGE>
selected), no matter how long the Annuitant (or other payee) lives and no matter
how long all Annuitants as a class live. Therefore, the mortality charge is
deducted during the annuity phase on all contracts, including those that do not
involve a life contingency, even though the Company does not bear direct
mortality risk with respect to variable annuity settlement options that do not
involve life contingencies. The expense risk arises from the Company's guarantee
that the charges it makes will not exceed the limits described in the Contracts
and in this Prospectus.
If the charge for mortality and expense risks is not sufficient to cover actual
mortality experience and expenses, the Company will absorb the losses. If
expenses are less than the amounts provided to the Company by the charge, the
difference will be a profit to the Company. To the extent this charge results in
a profit to the Company, such profit will be available for use by the Company
for, among other things, the payment of distribution, sales and other expenses.
Since mortality and expense risks involve future contingencies which are not
subject to precise determination in advance, it is not feasible to identify
specifically the portion of the charge which is applicable to each. The Company
estimates that a reasonable allocation might be .80% for mortality risk and .45%
for expense risk.
ADMINISTRATIVE EXPENSE CHARGE -- The Company assesses each Sub-Account with a
daily charge at an annual rate of 0.15% of the average daily net assets of the
Sub-Account. The charge is imposed during both the accumulation period and the
annuity period. The daily Administrative Expense Charge is assessed to help
defray administrative expenses actually incurred in the administration of the
Sub-Account, without profits. However, there is no direct relationship between
the amount of administrative expenses imposed on a given contract and the amount
of expenses actually attributable to that contract.
Deductions for the Contract Fee (described under B. CONTRACT FEE) and for the
Administrative Expense Charge are designed to reimburse the Company for the cost
of administration and related expenses and are not expected to be a source of
profit. The administrative functions and expense assumed by the Company in
connection with the Variable Account and the Contracts include, but are not
limited to, clerical, accounting, actuarial and legal services, rent, postage,
telephone, office equipment and supplies, expenses of preparing and printing
registration statements, expense of preparing and typesetting prospectuses and
the cost of printing prospectuses not allocable to sales expense, filing and
other fees.
B. CONTRACT FEE.
A $30 Contract Fee currently is deducted on the Contract anniversary date and
upon full surrender of the Contract when the Accumulated Value is $50,000 or
less. The Contract Fee is waived for Contracts issued to and maintained by the
Trustee of a 401(k) plan. Where Contract value has been allocated to more than
one account, a percentage of the total Contract Fee will be deducted from the
Value in each account. The portion of the charge deducted from each account will
be equal to the percentage which the Value in that account bears to the
Accumulated Value under the Contract. The deduction of the Contract Fee from a
Sub-Account will result in cancellation of a number of Accumulation Units equal
in value to the percentage of the charge deducted from that account.
C. PREMIUM TAXES.
Some states and municipalities impose a premium tax on variable annuity
Contracts. State premium taxes currently range up to 3.5%.
The Company makes a charge for state and municipal premium taxes, when
applicable, and deducts the amount paid as a premium tax charge. The current
practice of the Company is to deduct the premium tax charge in one of two ways:
(1) if the premium tax was paid by the Company when purchase payments were
received, the premium tax charge is deducted on a pro rata basis when
withdrawals are made, upon surrender
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<PAGE>
of the Contract, or when annuity benefit payments begin (the Company
reserves the right instead to deduct the premium tax charge for these
Contracts at the time the purchase payments are received); or
(2) the premium tax charge is deducted when annuity benefit payments begin.
In no event will a deduction be taken before the Company has incurred a tax
liability under applicable state law
If no amount for premium tax was deducted at the time the payment was received,
but subsequently tax is determined to be due prior to the Annuity Date, the
Company reserves the right to deduct the premium tax from the Accumulated Value
at the time such determination is made.
D. CONTINGENT DEFERRED SALES CHARGE.
No charge for sales expense is deducted from payments at the time the payments
are made. However, a contingent deferred sales charge is deducted from the
Accumulated Value of the Contract in the case of surrender and/or withdrawals
under the Contract or at the time annuity benefit payments begin, within certain
time limits described below.
For purposes of determining the contingent deferred sales charge, the
Accumulated Value is divided into three categories: (1) New Payments -- payments
received by the Company during the seven years preceding the date of the
surrender; (2) Old Payments -- Accumulated payments not defined as New Payments;
and (3) Earnings -- the amount of Accumulated Value in excess of all payments
that have not been previously surrendered. For purposes of determining the
amount of any contingent deferred sales charge, surrenders will be deemed to be
taken first from Old Payments, then from New Payments. Old Payments may be
withdrawn from the Contract at any time without the imposition of a contingent
deferred sales charge. If a withdrawal is attributable all or in part to New
Payments, a contingent deferred sales charge may apply.
CHARGES FOR SURRENDER AND WITHDRAWALS. If a Contract is surrendered, or if New
Payments are withdrawn, while the Contract is in force and before the Annuity
Date, a contingent deferred sales charge may be imposed. The amount of the
charge will depend upon the number of years that the New Payments, if any, to
which the withdrawal is attributed have remained credited under the Contract.
Amounts withdrawn are deducted first from Old Payments. Then, for the purpose of
calculating surrender charges for New Payments, all amounts withdrawn are
assumed to be deducted first from the earliest New Payment and then from the
next earliest New Payment and so on, until all New Payments have been exhausted
pursuant to the first-in-first-out ("FIFO") method of accounting. (See "FEDERAL
TAX CONSIDERATIONS" for a discussion of how withdrawals are treated for income
tax purposes.)
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The Contingent Deferred Sales Charges are as follows:
<TABLE>
<CAPTION>
YEARS FROM CHARGE AS PERCENTAGE
DATE OF OF NEW
PAYMENT PAYMENTS WITHDRAWN
- --------------------------- -------------------------
<S> <C>
less than 1 7%
2 6%
3 5%
4 4%
5 3%
6 2%
7 1%
More than 7 0%
</TABLE>
The amount withdrawn equals the amount requested by the Contract Owner plus the
charge, if any. The charge is applied as a percentage of the New Payments
redeemed, but in no event will the total contingent deferred sales charge exceed
a maximum limit of 7% of total gross New Payments. Such total charge equals the
aggregate of all applicable contingent deferred sales charges for surrender,
withdrawals, and annuitization.
REDUCTION OR ELIMINATION OF SURRENDER CHARGE. Where permitted by law, the
Company will waive the contingent deferred sales charge in the event that an
Owner (or the Annuitant, if the Owner is not an individual) is: (a) admitted to
a medical care facility after the issue date of the Contract and remains
confined there until the later of one year after the issue date or 90
consecutive days; (b) first diagnosed by a licensed physician as having a fatal
illness after the issue date of the contract; or (c) physically disabled after
the issue date of the Contract and before attaining age 65. The Company may
require proof of such disability and continuing disability, including written
confirmation of receipt and approval of any claim for Social Security Disability
Benefits and reserves the right to obtain an examination by a licensed physician
of its choice and at its expense.
For purposes of the above provision, "medical care facility" means any state
licensed facility (or, in a state that does not require licensing a facility
that is operating pursuant to state law), providing medically necessary
inpatient care which is prescribed by a licensed "physician" in writing and
based on physical limitations which prohibit daily living in a non-institutional
setting; "fatal illness" means a condition diagnosed by a licensed physician
which is expected to result in death within two years of the diagnosis; and
"physician" means a person other than the Owner, Annuitant or a member of one of
their families who is state licensed to give medical care or treatment and is
acting within the scope of that license.
Where contingent deferred sales charges have been waived under any one of three
situations discussed above, no additional payments under this Contract will be
accepted.
Where permitted by law, no contingent deferred sales charge is imposed (and no
commissions will be paid) on contracts issued where both the Contract Owner and
the Annuitant on the date of issue are within the following classes of
individuals ("eligible persons"): employees and registered representatives of
any broker-dealer which has entered into a Sales Agreement with the Company to
sell the Contract; officers, directors, trustees and employees of any of the
Underlying Funds, investment managers or sub-advisers; and the spouses and
children/ other legal dependants (under age 21) of such eligible persons.
In addition, from time to time the Company may also reduce the amount of the
contingent deferred sales charge, the period during which it applies, or both,
when Contracts are sold to individuals or groups of individuals in a manner that
reduces sales expenses. The Company will consider (a) the size and type of
group; (b) the total amount of payments to be received; (c) other transactions
where sales expenses are likely to be reduced. Any reduction or elimination in
the amount or duration of the contingent deferred sales charge will not
discriminate unfairly between purchasers of this Contract. The Company will not
make any changes to this charge where prohibited by law.
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Pursuant to Section 11 of the 1940 Act and Rule 11a-2 thereunder, the contingent
deferred sales charges is modified to effect certain exchanges of the annuity
contracts for the Contracts. See Statement of Additional Information.
WITHDRAWAL WITHOUT SURRENDER CHARGE. In each calendar year, the Company will
waive the contingent deferred sales charge, if any, on an amount ("Withdrawal
Without Surrender Charge") equal to the greatest of (1), (2) or (3):
Where (1) is:
The Accumulated Value as of the Valuation Date coincident with or next
following the date of receipt of the request for withdrawal, reduced by
total gross payments not previously withdrawn ("Cumulative Earnings")
Where (2) is:
15% of the Accumulated Value as of the Valuation Date coincident with or
next following the date of receipt of the request for withdrawal, reduced
by the total amount of any prior withdrawals made in the same calendar year
to which no contingent deferred sales charge was applied.
Where (3) is:
The amount calculated under the Company's life expectancy distribution
(see"LED Distributions," below) whether or not the withdrawal was part of
such distribution (applies only if Annuitant is also an Owner)
For example, an 81 year old Contract Owner/Annuitant with an Accumulated Value
of $15,000, of which $1,000 is Cumulative Earnings, would have a Free Withdrawal
Amount of $2,250, which is equal to the greatest of:
(1) Cumulative Earnings ($1,000);
(2) 15% of Accumulated Value ($2,250); or
(3) LED distribution of 10.2% of Accumulated Value ($1,530).
The Withdrawal Without Surrender Charge will first be deducted from Cumulative
Earnings. If the Withdrawal Without Surrender Charge exceeds Cumulative
Earnings, the excess amount will be deemed withdrawn from payments not
previously withdrawn on a last-in-first-out ("LIFO") basis. If more than one
withdrawal is made during the year, on each subsequent withdrawal the Company
will waive the contingent deferred sales charge, if any, until the entire
Withdrawal Without Surrender Charge has been withdrawn. Amounts withdrawn from a
Guarantee Period Account prior to the end of the applicable Guarantee Period
will be subject to a Market Value Adjustment.
LED DISTRIBUTIONS. Prior to the Annuity Date a Contract Owner who is also the
Annuitant may elect to make a series of systematic withdrawals from the Contract
according to a life expectancy distribution ("LED") option, by returning a
properly signed LED request form to the Company's Principal Office. The LED
option permits the Contract Owner to make systematic withdrawals from the
Contract over his or her lifetime. The amount withdrawn from the Contract
changes each year, because life expectancy changes each year that a person
lives. For example, actuarial tables indicate that a person age 70 has a life
expectancy of 16 years, but a person who attains age 86 has a life expectancy of
another 6.5 years.
If a Contract Owner elects the LED option, in each contract year a fraction of
the Accumulated Value is withdrawn based on the Contract Owner's then life
expectancy. The numerator of the fraction is 1 (one) and the denominator of the
fraction is the remaining life expectancy of the Contract Owner, as determined
annually by the Company. The resulting fraction, expressed as a percentage, is
applied to the Accumulated Value at the beginning of the year to determine the
amount to be distributed during
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the year. The Contract Owner may elect monthly, bimonthly, quarterly,
semiannual, or annual distributions, and may terminate the LED option at any
time. The Contract Owner may also elect to receive distributions under an LED
option which is determined on the joint life expectancy of the Contract Owner
and a beneficiary. The Company may also offer other systematic withdrawal
options.
If a Contract Owner makes withdrawals under the LED distribution prior to age
59 1/2, the withdrawals may be treated by the IRS as premature distributions
from the Contract. The payments would then be taxed on an "income first" basis,
and be subject to a 10% federal tax penalty. For more information, see "FEDERAL
TAX CONSIDERATIONS" and "B. Taxation of the Contracts in General." The LED will
cease on the Annuity Date.
SURRENDERS. In the case of a complete surrender, the amount received by the
Contract Owner is equal to the entire Accumulated Value under the Contract, net
of the applicable contingent deferred sales charge on New Payments, the Contract
Fee and any applicable tax withholding and adjusted for any applicable market
value adjustment. Subject to the same rules that are applicable to withdrawals,
the Company will not assess a contingent deferred sales charge on an amount
equal to the greater of the Withdrawal Without Surrender Charge Amount,
described above, or the life expectancy distribution, if applicable.
Where a Contract Owner who is trustee under a pension plan surrenders, in whole
or in part, a Contract on a terminating employee, the trustee will be permitted
to reallocate all or a part of the total Accumulated Value under the Contract to
other contracts issued by the Company and owned by the trustee, with no
deduction for any otherwise applicable contingent deferred sales charge. Any
such reallocation will be at the unit values for the Sub-Accounts as of the
valuation date on which a written, signed request is received at the Company's
Principal Office.
For further information on surrender and withdrawals, including minimum limits
on amount withdrawn and amount remaining under the Contract in the case of
withdrawals, and important tax considerations, see "Surrender" and "Withdrawals"
under "DESCRIPTION OF THE CONTRACT" and see "FEDERAL TAX CONSIDERATIONS."
CHARGE AT THE TIME ANNUITY BENEFIT PAYMENTS BEGIN. If any commutable period
certain option or a non-commutable period certain option for less than ten years
is chosen, a contingent deferred sales charge will be deducted from the
Accumulated Value of the Contract if the Annuity Date occurs at any time when
the surrender charge would still apply had the Contract been surrendered on the
Annuity Date.
No contingent deferred sales charge is imposed at the time of annuitization in
any Contract year under an option involving a life contingency or for any
non-commutable period certain option for ten years or more. However, a Market
Value Adjustment may apply. See "Guarantee Period Accounts".
If an owner of a fixed annuity Contract issued by the Company wishes to elect a
variable annuity option, the Company may permit such owner to exchange, at the
time of annuitization, the fixed Contract for a Contract offered in this
Prospectus. The proceeds of the fixed Contract, minus any contingent deferred
sales charge applicable under the fixed Contract if a period certain option is
chosen, will be applied towards the variable annuity option desired by the
owner. The number of Annuity Units under the option will be calculated using the
Annuity Unit values as of the 15th of the month preceding the Annuity Date.
E. TRANSFER CHARGE.
The Company currently makes no charge for processing transfers. The Company
guarantees that the first twelve transfers in a Contract Year will be free of a
transfer charge, but reserves the right to assess a charge, guaranteed never to
exceed $25, for the thirteenth and each subsequent transfer in a Contract Year.
The Contract Owner may have automatic transfers of at least $100 a month made on
a periodic basis (a) from Sub-Account 203 (which invests in the Capital Reserves
Series), Sub-Account 204 (which invests in the Money Market Series) or from the
Fixed Account to one or more of the other Sub-
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Accounts, or (b) in order to reallocate Accumulated Value among the
Sub-Accounts. The first automatic transfer counts as one transfer towards the
twelve transfers which are guaranteed to be free of a transfer change in each
Contract year. For more information, see "Transfer Privilege."
OTHER CHARGES -- Because the Sub-Accounts purchase shares of the Fund, the value
of the net assets of the Sub-Accounts will reflect the investment advisory fee
and other expenses incurred by the Underlying Series. The Prospectus and
Statement of Additional Information of the Fund contain additional information
concerning expenses of the Underlying Series.
SALES EXPENSE The Company pays commissions on the Contracts of up to 6.5% of
purchase payments to entities which sell the Contracts. To the extent permitted
by NASD rules, expense reimbursement allowances and additional payments for
other services not directly related to the sale of the Contracts, including the
recruitment and training of personnel, production of promotional literature, and
similar services may also be made.
The Company intends to recoup the commissions and other sales expenses through a
combination of anticipated contingent deferred sales charges, described above,
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 Contract Owners or the Variable Account. Any
contingent deferred sales charges assessed on a Contract will be retained by the
company.
DESCRIPTION OF THE CONTRACT
The Contracts are designed for use in connection with several types of
retirement plans as well as for sale to individuals. Participants under such
plans, as well as Contract Owners, Annuitants, and beneficiaries, are cautioned
that the rights of any person to any benefits under such Contracts may be
subject to the terms and conditions of the plans themselves, regardless of the
terms and conditions of the Contracts.
The Contracts offered by the Prospectus may be purchased from representatives of
Allmerica Investments, Inc., a registered broker-dealer under the Securities
Exchange Act of 1934 and a member of the National Association of Securities
Dealers, Inc. (NASD). Allmerica Investments, Inc., 440 Lincoln Street,
Worcester, Massachusetts, 01653, is indirectly wholly-owned by the Company. The
Contracts also may be purchased from certain independent broker-dealers which
are NASD members.
Contract Owners may direct any inquiries to Annuity Customer Services, First
Allmerica Financial Life Insurance Company, 440 Lincoln Street, Worcester,
Massachusetts 01653 1-800-533-2124.
A. PAYMENTS.
The Company's underwriting requirements, which include receipt of the initial
payment and allocation instructions by the Company at its Principal Office, must
be met before a Contract can be issued. These requirements may also include the
proper completion of an application; however, where permitted, the Company may
issue a contract without completion of an application for certain classes of
annuity contracts. Payments are to be made payable to the Company. A net payment
is equal to the payment received less the amount of any applicable premium tax.
The initial net payment will be credited to the Contract as of the date that all
underwriting requirements are properly met. If all underwriting requirements are
not complied with within five business days of the Company's receipt of the
initial payment, the payment will be immediately returned unless the Owner
specifically consents to the holding of the initial payment until completion of
any outstanding underwriting requirements. Subsequent payments will be credited
as of the Valuation Date received at the Principal Office.
Payments are not limited as to frequency and number, but there are certain
limitations as to amount. Currently, the initial payment must be at least $600
($1,000 in Washington). Under a salary deduction or monthly automatic payment
plan, the minimum initial payment is $50. In all cases, each subsequent payment
must be at least $50. Where the contribution on behalf of an employee under an
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employer-sponsored retirement plan is less than $600 but more than $300
annually, the Company may issue a contract on the employee, if the plan's
average annual contribution per eligible plan participant is at least $600. The
minimum allocation to a Guarantee Period Account is $1,000. If less than $1,000
is allocated to a Guarantee Period Account, the Company reserves the right to
apply that amount to Sub-Account 204 (Money Market Series).
Generally, unless otherwise requested, all payments will be allocated among the
accounts in the same proportion that the initial net payment is allocated, or,
if subsequently changed, according to the most recent allocation instructions.
However, any portion of the initial net payment and of additional net payments
received during the contracts's first fifteen days measured from the date of
issue, allocated to any Sub-Account and/or any Guarantee Period Account, will be
held in Sub-Account 204 (Money Market Series) until the end of the fifteen day
period. Thereafter, these amounts will be allocated as requested.
The Contract Owner may change allocation instructions for new payments pursuant
to a written or telephone request. If telephone requests are elected by the
Contract Owner, a properly completed authorization must be on file before
telephone requests will be honored. The policy of the Company and its agents and
affiliates is that they will not be responsible for losses resulting from acting
upon telephone requests reasonably believed to be genuine. The Company will
employ reasonable procedures to confirm that instructions communicated by
telephone are genuine; otherwise, the Company may be liable for any losses due
to unauthorized or fraudulent instructions. The procedures the Company follows
for transactions initiated by telephone include requirements that callers on
behalf of a Contract Owner identify themselves by name and identify the
Annuitant by name, date of birth and social security number. All transfer
instructions by telephone are tape recorded.
B. TRANSFER PRIVILEGE.
At any time prior to the Annuity Date a Contract Owner may have amounts
transferred among all accounts. Transfer values will be effected at the
Accumulation Value next computed after receipt of the transfer order. The
Company will make transfers pursuant to written or telephone requests. As
discussed in "A. Payments," a properly completed authorization form must be on
file before telephone requests will be honored.
Transfers to a Guarantee Period Account must be at least $1,000. If the amount
to be transferred to a Guarantee Period Account is less than $1,000, the Company
may transfer that amount to Sub-Account 204 (Money Market Series).
The Contract Owner may have automatic transfers of at least $100 each made on a
periodic basis from the Sub-Accounts investing in the Capital Reserves Series or
the Money Market Series, or from the Fixed Account to one or more of the other
Sub-Accounts or may periodically reallocate values among the Sub-Accounts.
Automatic transfers may be made on a monthly, bimonthly, quarterly, semiannual
or annual schedule. The first automatic transfer counts as one transfer towards
the twelve transfers discussed below. Any subsequent automatic transfer will not
count as a transfer for purposes of the charge.
Currently, the Company makes no charge for processing transfers. The first
twelve (12) transfers in a Contract year are guaranteed to be free of any
transfer charge. For each subsequent transfer in a Contract year, the Company
reserves the right to assess a charge, guaranteed never to exceed $25, to
reimburse it for the expense of processing transfers.
C. SURRENDER.
At any time prior to the Annuity Date, a Contract Owner may surrender the
Contract and receive its Accumulated Value, less applicable charges and adjusted
for any Market Value Adjustment ("Surrender Amount"). The Contract Owner must
return the Contract and a signed, written request for surrender, satisfactory to
the Company, to the Company's Principal Office. The amount payable to the
Contract Owner upon surrender will be based on the Contract's Accumulated Value
as of the Valuation Date on which the request and the Contract are received at
the Company's Principal Office.
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Before the Annuity Date, a contingent deferred sales charge may be deducted when
a Contract is surrendered if payments have been credited to the Contract during
the last seven full contract years. See "CHARGES AND DEDUCTIONS." The Contract
Fee will be deducted upon surrender of the Contract.
After the Annuity Date, only Contracts under which future annuity benefit
payments are limited to a specified period (as specified in the Period Certain
Annuity Option) may be surrendered. The Surrender Amount is the commuted value
of any unpaid installments, computed on the basis of the assumed interest rate
incorporated in such annuity benefit payments. No contingent deferred sales
charge is imposed after the Annuity Date.
Any amount surrendered is normally payable within seven days following the
Company's receipt of the surrender request. The Company reserves the right to
defer surrenders and withdrawals of amounts in each Sub-Account in any period
during which (1) trading on the New York Stock Exchange is restricted as
determined by the SEC or such Exchange is closed for other than weekends and
holidays, (2) the SEC has by order permitted such suspension, or (3) an
emergency, as determined by the SEC, exists such that disposal of portfolio
securities or valuation of assets of each separate account is not reasonably
practicable.
The right is reserved by the Company to defer surrenders and withdrawals of
amounts allocated to the Company's Fixed Account and Guarantee Period Accounts
for a period not to exceed six months.
The surrender rights of Contract Owners who are participants under Section
403(b) plans or who are participants in the Texas Optional Retirement Program
(Texas ORP) are restricted; see "FEDERAL TAX CONSIDERATIONS," "I. Public School
Systems and Certain Tax Exempt Organizations" and "J. Texas Optional Retirement
Program."
For important tax consequences which may result from surrender, see "FEDERAL TAX
CONSIDERATIONS."
D. WITHDRAWALS.
At any time prior to the Annuity Date, a Contract Owner may withdraw a portion
of the Accumulated Value of his or her Contract, subject to the limits stated
below. The Contract Owner must file a signed, written request for withdrawal,
satisfactory to the Company, at the Company's Principal Office. The written
request must indicate the dollar amount the Contract Owner wishes to receive and
the accounts from which such amount is to be withdrawn. The amount withdrawn
equals the amount requested by the Contract Owner plus any applicable contingent
deferred sales charge, as described under "CHARGES AND DEDUCTIONS." In addition,
amounts redeemed from a Guarantee Period Account prior to the end of the
applicable Guarantee Period will be subject to a Market Value Adjustment, as
described under "GUARANTEE PERIOD ACCOUNTS".
Where allocations have been made to more than one account, a percentage of the
withdrawal may be allocated to each such account. A withdrawal from a
Sub-Account will result in cancellation of a number of units equivalent in value
to the amount withdrawn, computed as of the Valuation Date that the request is
received at the Company's principal office.
Each withdrawal must be in a minimum amount of $100. No withdrawal will be
permitted if the Accumulated Value remaining under the Contract would be reduced
to less than $1,000. Withdrawals will be paid in accordance with the time
limitations described under "Surrender."
After the Annuity Date, only Contracts under which future variable annuity
benefit payments are limited to a specified period may be withdrawn. A
withdrawal after the Annuity Date will result in cancellation of a number of
Annuity Units equivalent in value to the amount withdrawn.
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For important restrictions on withdrawals which are applicable to Contract
Owners who are participants under Section 403(b) plans or under the Texas ORP,
see "FEDERAL TAX CONSIDERATIONS," "I. Public School Systems and Certain Tax
Exempt Organizations" and "J. Texas Optional Retirement Program." For important
tax consequences which may result from withdrawals, see "FEDERAL TAX
CONSIDERATIONS."
E. DEATH BENEFIT.
If the Annuitant dies (or a Contract Owner predeceases the Annuitant) prior to
the Annuity Date while the Contract is in force, the Company will pay the
beneficiary a death benefit, except where the Contract continues as provided in
"F. THE SPOUSE OF THE CONTRACT OWNER AS BENEFICIARY."
Upon death of the Annuitant (including an Owner who is also the Annuitant), the
death benefit is equal to the greatest of (a) the Accumulated Value under the
Contract increased for any positive Market Value Adjustment, (b) gross payments
reduced proportionately to reflect withdrawals (for each withdrawal, the
proportionate reduction is calculated as the death benefit under this option
immediately prior to the withdrawal multiplied by the withdrawal amount and
divided by the Accumulated Value immediately prior to the withdrawal), or (c) or
the death benefit that would have been payable on the most recent contract
anniversary, increased for subsequent payments and reduced proportionally to
reflect withdrawals after that date.
If an Owner who is not also the Annuitant dies before the Annuity Date, the
death benefit will be the Accumulated Value increased by any positive Market
Value Adjustment. The death benefit will never be reduced by a negative Market
Value Adjustment. The death benefit will generally be paid to the Beneficiary in
one sum within 7 days of the receipt of due proof of death unless the Owner has
specified a death benefit annuity option. Instead, the Beneficiary may, by
Written Request, elect to:
(a) defer distribution of the death benefit for a period no more than 5
years from the date of death; or
(b) receive a life annuity or an annuity for a period certain not extending
beyond the Beneficiary's life expectancy. Annuity benefit payments must
begin within one year from the date of death.
If distribution of the death benefit is deferred under (a) or (b), any value in
the Guarantee Period Accounts will be transferred to Sub-Account 204 (Money
Market Series). The excess, if any, of the death benefit over the Accumulated
Value will also be added to Sub-Account 204 (Money Market Series). The
Beneficiary may, by Written Request, effect transfers and withdrawals during the
deferral period and prior to annuitization under (b), but may not make
additional payments. If there are multiple Beneficiaries, the consent of all is
required.
If the Annuitant's death occurs on or after the Annuity Date but before the
completion of all guaranteed annuity benefit payments, any unpaid amounts or
installments will be paid to the beneficiary. The Company must pay the remaining
payments at least as rapidly as under the payment option in effect on the date
of the Annuitant's death.
With respect to any death benefit, the Accumulated Value under the Contract
shall be based on the unit values next computed after due proof of the
Annuitant's death has been received at the Company's Principal Office. If the
beneficiary elects to receive the death benefit in one sum, the death benefit
will be paid within seven business days. If the beneficiary has not elected an
annuity option within one year from the date notice of death is received by the
Company, the Company will pay the death benefit in one sum. The death benefit
will reflect any earnings or losses experienced during the period and any
withdrawals.
F. THE SPOUSE OF THE CONTRACT OWNER AS BENEFICIARY.
The Contract Owner's spouse, if named as the sole beneficiary, may by written
request continue the Contract in lieu of receiving the amount payable upon death
of the Contract Owner. Upon such
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election, the spouse will become the Owner and Annuitant subject to the
following: (a) any value in the Guarantee Period Accounts will be transferred to
Sub-Account 204 (Money Market Series); (b) the excess, if any, of the death
benefit over the Contract's Accumulated Value will also be added to Sub-Account
204 (Money Market Series). Additional payments may be made; however, a surrender
charge will apply to these amounts. All other rights and benefits provided in
the Contract will continue, except that any subsequent spouse of such new
Contract Owner will not be entitled to continue the Contract upon such new
Owner's death.
G. ASSIGNMENT.
The Contracts, other than those sold in connection with certain qualified plans,
may be assigned by the Contract Owner at any time prior to the Annuity Date and
while the Annuitant is alive (see "FEDERAL TAX CONSIDERATIONS"). The Company
will not be deemed to have knowledge of an assignment unless it is made in
writing and filed at the Principal Office. The Company will not assume
responsibility for determining the validity of any assignment. If an assignment
of the Contract is in effect on the Annuity Date, the Company reserves the right
to pay to the assignee, in one sum, that portion of the Surrender Value of the
Contract to which the assignee appears to be entitled. The Company will pay the
balance, if any, in one sum to the Contract Owner in full settlement of all
liability under the Contract. The interest of the Contract Owner and of any
beneficiary will be subject to any assignment.
H. ELECTING THE FORM OF ANNUITY AND THE ANNUITY DATE.
Subject to certain restrictions described below, the Contract Owner has the
right (1) to select the annuity option under which annuity benefit payments are
to be made, and (2) to determine whether payments are to be made on a fixed
basis, a variable basis, or a combination fixed and variable basis. Annuity
benefit payments are determined according to the annuity tables in the Contract,
by the annuity option selected, and by the investment performance of the
account(s) selected.
To the extent a fixed annuity is selected, Accumulated Value will be transferred
to the Fixed Account of the Company, and the annuity benefit payments will be
fixed in amount. See APPENDIX A, "MORE INFORMATION ABOUT THE FIXED ACCOUNT."
Under a variable annuity, a payment equal to the value of the fixed number of
Annuity Units in the Sub-Account(s) is made monthly, quarterly, semiannually or
annually. Since the value of an Annuity Unit in a Sub-Account will reflect the
investment performance of the Sub-Account, the amount of each annuity benefit
payment will vary.
The annuity option selected must produce an initial payment of at least $50 (a
lower amount may be required under some state laws). The Company reserves the
right to increase these minimum amounts. If the annuity option(s) selected
do(es) not produce an initial payment which meet this minimum, a single payment
will be made. Once the Company begins making annuity benefit payments, the
Annuitant cannot make withdrawals or surrender the annuity except in the case
where future annuity benefit payments are limited to a "period certain." Only
beneficiaries entitled to receive remaining payments for a "period certain" may
elect to instead receive a lump sum settlement.
The Annuity Date is selected by the Contract Owner. To the extent permitted in
your state, the Annuity Date may be the first day of any month (a) before the
Annuitant's 85th birthday, if the Annuitant's age at the date of issue of the
Contract is 75 or under, or (b) within 10 years from the date of issue of the
Contract and before the Annuitant's 90th birthday, if the Annuitant's age at the
date of issue is between 76 and 90. The Contract Owner may elect to change the
Annuity Date by sending a request to the Company's Principal Office at least one
month before the new Annuity date. The new Annuity Date must be the first day of
any month occurring before the Annuitant's 90th birthday and must be within the
life expectancy of the Annuitant. The Company shall determine such life
expectancy at the time a change in Annuity Date is requested. The Internal
Revenue Code (the "Code") and
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the terms of qualified plans impose limitations on the age at which annuity
benefit payments may commence and the type of annuity option selected. See
"FEDERAL TAX CONSIDERATIONS" for further information.
If the Contract Owner does not elect otherwise, a variable life annuity with
periodic payments for 10 years guaranteed will be purchased. Changes in either
the Annuity Date or annuity option can be made up to one month prior to the
Annuity Date.
I. DESCRIPTION OF VARIABLE ANNUITY OPTIONS.
The Company provides the variable annuity options described below. Currently,
variable annuity options may be funded through the Equity/Income Series, the
Capital Reserves Series and the Multiple Strategy Series.
The Company also provides these same options funded through the fixed account
(fixed-amount annuity option). Regardless of how payments were allocated during
the accumulation period, any one of the variable annuity options or the
fixed-amount options may be selected, or any one of the variable annuity options
may be selected in combination with any one of the fixed-amount annuity options.
Other annuity options may be offered by the Company.
VARIABLE LIFE ANNUITY WITH PAYMENTS GUARANTEED FOR 10 YEARS. This is a variable
annuity payable periodically during the lifetime of the payee with the guarantee
that if the payee should die before all payments have been made, the remaining
annuity benefit payments will continue to the beneficiary.
VARIABLE LIFE ANNUITY PAYABLE PERIODICALLY DURING THE LIFETIME OF THE PAYEE
ONLY. It would be possible under this option for the Annuitant to receive only
one annuity benefit payment if the Annuitant dies prior to the due date of the
second annuity benefit payment, two annuity benefit payments if the Annuitant
dies before the due date of the third annuity benefit payment, and so on.
However, payments will continue during the lifetime of the payee, no matter how
long the payee lives.
UNIT REFUND VARIABLE LIFE ANNUITY. This is a variable annuity payable
periodically during the lifetime of the payee with the guarantee that if (1)
exceeds (2) then periodic variable annuity benefit payments will continue to the
beneficiary until the number of such payments equals the number determined in
(1).
Where: (1) is the dollar amount of the Accumulated Value divided by the dollar
amount of the first payment, and
(2) is the number of payments paid prior to the death of the payee.
JOINT AND SURVIVOR VARIABLE LIFE ANNUITY. This variable annuity is payable
jointly to two payees during their joint lifetime, and then continuing during
the lifetime of the survivor. The amount of each payment to the survivor is
based on the same number of Annuity Units which applied during the joint
lifetime of the two payees. One of the payees must be either the person
designated as the Annuitant in the Contract or the beneficiary. There is no
minimum number of payments under this option.
JOINT AND TWO-THIRDS SURVIVOR VARIABLE LIFE ANNUITY. This is a variable annuity
payable jointly to two payees during their joint lifetime, and then continuing
thereafter during the lifetime of the survivor. However, the amount of each
periodic payment to the survivor is based upon two-thirds of the number of
Annuity Units which applied during the joint lifetime of the two payees. One of
the payees must be the person designated as the Annuitant in the Contract or the
beneficiary. There is no minimum number of payments under this option.
PERIOD CERTAIN VARIABLE ANNUITY. This variable annuity provides periodic
payments for a stipulated number of years ranging from one to thirty. The Period
Certain Option does not involve a life contingency. In the computation of the
payments under this option, the charge for annuity rate guarantees, which
includes a factor for mortality risks, is made. Although not contractually
required to do so, the Company currently follows a practice of permitting
persons receiving payments under the Period Certain Option to elect to convert
to a variable annuity involving a life contingency. The
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Company may discontinue or change this practice at any time, but not with
respect to election of the option made prior to the date of any change in this
practice. See "FEDERAL TAX CONSIDERATIONS" for a discussion of the possible
adverse tax consequences of selecting a Period Certain Option.
J. NORRIS DECISION.
In the case of ARIZONA GOVERNING COMMITTEE V. NORRIS, the United States Supreme
Court ruled that, in connection with retirement benefit options offered under
certain employer-sponsored employee benefit plans, annuity options based on
sex-distinct actuarial tables are not permissible under Title VII of the Civil
Rights Act of 1964. The ruling requires that benefits derived from contributions
paid into a plan after August 1, 1983 be calculated without regard to the sex of
the employee. Annuity benefits attributable to payments received by the Company
under a Contract issued in connection with an employer-sponsored benefit plan
affected by the Norris decision will be based on the greater of (1) the
Company's unisex Non-Guaranteed Current Annuity Option Rates or (2) the
guaranteed unisex rates described in such Contract, regardless of whether the
Annuitant is male or female.
K. COMPUTATION OF VALUES AND ANNUITY BENEFIT PAYMENTS.
THE ACCUMULATION UNIT. Each net payment is allocated to the account(s) selected
by the Contract Owner. Allocations to the Sub-Accounts are credited to the
Contract in the form of Accumulation Units. Accumulation Units are credited
separately for each Sub-Account. The number of Accumulation Units of each
Sub-Account credited to the Contract is equal to the portion of the net payment
allocated to the Sub-Account, divided by the dollar value of the applicable
Accumulation Unit as of the Valuation Date the payment is received at the
Company's Principal Office. The number of Accumulation Units resulting from each
payment will remain fixed unless changed by a subsequent split of Accumulation
Unit value, a transfer, withdrawals, or surrender. The dollar value of an
Accumulation Unit of each Sub-Account varies from Valuation Date to Valuation
Date based on the investment experience of that Sub-Account and will reflect the
investment performance, expenses and charges of its Underlying Funds. The value
of an Accumulation Unit was set at $1.00 on the first Valuation Date for each
Sub-Account.
Allocations to the Guarantee Period Account and the Fixed Account are not
converted into Accumulation Units, but are credited interest at a rate
periodically set by the Company.
The Accumulated Value under the Contract is determined by (1) multiplying the
number of Accumulation Units in each Sub-Account by the value of an Accumulation
Unit of that Sub-Account on the Valuation Date, (2) adding the products, and (3)
adding the amount of the accumulations in the Fixed Account, if any.
NET INVESTMENT FACTOR. The Net Investment Factor is an index that measures the
investment performance of a Sub-Account from one Valuation Period to the next.
This factor is equal to 1.000000 plus the result from dividing (a) by (b) and
subtracting (c) and (d) where:
(a) is the investment income of a Sub-Account for the Valuation Period,
including realized or unrealized capital gains and losses during the
Valuation Period, adjusted for provisions made for taxes, if any;
(b) is the value of that Sub-Account's assets at the beginning of the
Valuation Period;
(c) is a charge for mortality and expense risks equal to 1.25% on an annual
basis of the daily value of the Sub-Account's assets, and
(d) is an administrative charge of 0.15% on an annual basis of the daily
value of the Sub-Account's assets.
The dollar value of an Accumulation Unit as of a given Valuation Date is
determined by multiplying the dollar value of the corresponding Accumulation
Unit as of the immediately preceding Valuation Date by the appropriate net
investment factor. For an illustration of an Accumulation Unit calculation
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using a hypothetical example see "ANNUITY PAYMENTS" in the Statement of
Additional Information. Subject to compliance with applicable state and federal
law, the Company reserves the right to change the methodology for determining
the net investment factor.
THE ANNUITY UNIT. On and after the Annuity Date the Annuity Unit is a measure
of the value of the Annuitant's monthly annuity benefit payables under a
variable annuity option. The value of an Annuity Unit in each Sub-Account
initially was set at $1.00. The value of an Annuity Unit under a Sub-Account on
any Valuation Date thereafter is equal to the value of such unit on the
immediately preceding Valuation Date, multiplied by the product of (1) the net
investment factor of the Sub-Account for the current Valuation Period and (2) a
factor to adjust benefits to neutralize the assumed interest rate. The assumed
interest rate, discussed below, is incorporated in the variable annuity options
offered in the Contract.
DETERMINATION OF THE FIRST AND SUBSEQUENT ANNUITY BENEFIT PAYMENTS. The first
periodic annuity benefit payment is based upon the Accumulated Value as of a
date not more than four weeks preceding the date that the first annuity benefit
payment is due. Currently, variable annuity benefit payments are made on the
first of a month based on unit values as of the 15th day of the preceding month.
The Contract provides annuity rates which determine the dollar amount of the
first periodic payment under each form of annuity for each $1,000 of applied
value. For life option and noncommutable period certain options of 10 or more
years, the annuity value is the Accumulated Value less any premium taxes and
adjusted for any Market Value Adjustment. For commutable period certain options
or any period certain option less than 10 years, the value is the Surrender
Value less any premium tax. For a death benefit annuity, the annuity value will
be the amount of the death benefit. The annuity rates in the Contract are based
on a modification of the 1983 Table on rates.
The amount of the first monthly payment depends upon the form of annuity
selected, the sex (however, see "J. Norris Decision") and age of the Annuitant
and the value of the amount applied under the annuity option. The variable
annuity options offered by the Company are based on a 3 1/2% assumed interest
rate. Variable payments are affected by the assumed interest rate used in
calculating the annuity option rates. Variable annuity benefit payments will
increase over periods when the actual net investment result of the
Sub-Account(s) funding the annuity exceeds the equivalent of the assumed
interest rate for the period. Variable annuity benefit payments will decrease
over periods when the actual net investment result of the respective Sub-Account
is less than the equivalent of the assumed interest rate for the period.
The dollar amount of the first periodic annuity benefit payment under life
annuity options and non-commutable period certain options of 10 years or more is
determined by multiplying (1) the Accumulated Value applied under that option
(after application of any Market Value Adjustment and less premium tax, if any)
divided by $1,000, by (2) the applicable amount of the first monthly payment per
$1,000 of value. For commutable period certain options and any period certain
option of less than 10 years, the Surrender Value less premium taxes, if any, is
used rather than the Accumulated Value. The dollar amount of the first variable
annuity benefit payment is then divided by the value of an Annuity Unit of the
selected Sub-Account(s) to determine the number of Annuity Units represented by
the first payment. This number of Annuity Units remains fixed under all annuity
options except the joint and two-thirds survivor annuity option. For each
subsequent payment, the dollar amount of the variable annuity benefit payment is
determined by multiplying this fixed number of Annuity Units by the value of an
Annuity unit on the applicable Valuation Date.
After the first payment, the dollar amount of each periodic variable annuity
benefit payment will vary with subsequent variations in the value of the Annuity
Unit of the selected Sub-Account(s). The dollar amount of each fixed amount
annuity benefit payment is fixed and will not change, except under the joint and
two-thirds survivor annuity option.
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The Company may from time to time offer its Contract Owners both fixed and
variable annuity rates more favorable than those contained in the Contract. Any
such rates will be applied uniformly to all Contract Owners of the same class.
For an illustration of variable annuity benefit payment calculation using a
hypothetical example, see "ANNUITY PAYMENTS" in the Statement of Additional
Information.
GUARANTEE PERIOD ACCOUNTS
Due to certain exemptive and exclusionary provisions in the securities laws,
interests in the Guarantee Period Accounts and the Company's Fixed Account are
not registered as an investment company under the provisions of the Securities
Act of 1933 or the Investment Company Act of 1940. Accordingly, the staff of the
Commission has not reviewed the disclosures in this Prospectus relating to the
Guarantee Period Accounts or the Fixed Account. Nevertheless, disclosures
regarding the Guarantee Period Accounts and the Fixed Account of this annuity
Contract or any benefits offered under these accounts may be subject to the
provisions of the Securities Act of 1933 relating to the accuracy and
completeness of statements made in the Prospectus.
INVESTMENT OPTIONS. In most jurisdictions, there are currently seven Guarantee
Periods available under this Contract with duration of three, five, six, seven,
eight, nine and ten years. Each Guarantee Period established for the Contract
Owner is accounted for separately in a non-unitized segregated account. Each
Guarantee Period Account provides for the accumulation of interest at a
Guaranteed Interest Rate. The Guaranteed Interest Rate on amounts allocated or
transferred to a Guarantee Period Account is determined from time-to-time by the
Company in accordance with market conditions; however, once an interest rate is
in effect for a Guarantee Period Account, the Company may not change it during
the duration of the Guarantee Period. In no event will the Guaranteed Interest
Rate be less than 3%.
To the extent permitted by law, the Company reserves the right at any time to
offer Guarantee Periods with durations that differ from those which were
available when a Contract was initially issued and to stop accepting new
allocations, transfers or renewals to a particular Guarantee Period.
Contract Owners may allocate net payments or make transfers from any of the
subaccounts, the Fixed Account or an existing Guarantee Period Account to
establish a new Guarantee Period Account at any time prior to the Annuity Date
(subject to the Fixed Account limitations in some states; see Appendix A, More
Information about the Fixed Account). Transfers from a Guarantee Period Account
on any date other than on the day following the expiration of that Guarantee
Period will be subject to a Market Value Adjustment. The Company establishes a
separate investment account each time the Contract Owner allocates or transfers
amounts to a Guarantee Period except that amounts allocated to the same
Guarantee Period on the same day will be treated as one Guarantee Period
Account. The minimum that may be allocated to establish a Guarantee Period
Account is $1,000. If less than $1,000 is allocated, the Company reserves the
right to apply that amount to the Money Market Account. The Contract Owner may
allocate amounts to any of the Guarantee Periods available.
At least 45 days, but not more than 75 days prior to the end of a Guarantee
Period, the Company will notify the Contract Owner in writing of the expiration
of that Guarantee Period. At the end of a Guarantee Period the Owner may
transfer amounts to the Sub-Accounts, the Fixed Account or establish a new
Guarantee Period Account of any duration then offered by the Company without a
Market Value Adjustment. If reallocation instructions are not received at the
Principal Office before the end of a Guarantee Period, the Account value will be
automatically applied to a new Guarantee Period Account with the same duration,
unless (a) less than $1,000 would remain in the Guarantee Period Account on the
expiration date, or (b) the Guarantee Period would extend beyond the Annuity
Date or is no longer available. In such cases, the Guarantee Period Account
value will be transferred to Sub-Account 204 (Money Market Series).
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MARKET VALUE ADJUSTMENT. No Market Value Adjustment will be applied to
transfers, withdrawals, or a surrender from a Guarantee Period Account on the
expiration of the Guarantee Period. In addition, no negative Market Value
Adjustment will be applied to a death benefit although a positive Market Value
Adjustment, if any, will be applied to increase the value of the death benefit
when based on the Contract's Accumulated Value. See " Death Benefit". A Market
Value Adjustment will apply to all other transfers, withdrawals, or a surrender.
Amounts applied under an annuity option are treated as withdrawals when
calculating the Market Value Adjustment. The Market Value Adjustment will be
determined by multiplying the amount taken from each Guarantee Period Account
before deduction of any Surrender Charge by the market value factor. The market
value factor for each Guarantee Period Account is equal to:
[(1+i)/(1+j)](n/365)-1
where:
i is the Guaranteed Interest Rate expressed as a decimal (for example: 3% =
0.03) being credited to the current Guarantee Period;
j is the new Guaranteed Interest Rate, expressed as a decimal, for a
Guarantee Period with a duration equal to the number of years remaining in
the current Guarantee Period, rounded to the next higher number of whole
years. If that rate is not available, the Company will use a suitable rate
or index allowed by the Department of Insurance; and
n is the number of days remaining from the Effective Valuation Date to the
end of the current Guarantee Period.
If the Guaranteed Interest Rate being credited is lower than the current
Guaranteed Interest Rate, the Market Value Adjustment will decrease the
Guarantee Period Account value. Similarly, if the Guaranteed Interest Rate being
credited is higher than the current Guaranteed Interest Rate, the Market Value
Adjustment will increase the Guarantee Period Account value. The Market Value
Adjustment will never result in a change to the value more than the interest
earned in excess of the Minimum Guarantee Period Account Interest Rate (see
Specifications page) compounded annually from the beginning of the current
Guarantee Period. For examples of how the Market Value Adjustment works, See
Appendix B.
WITHDRAWALS. Prior to the Annuity Date, the Contract Owner may make withdrawals
of amounts held in the Guarantee Period Accounts. Withdrawals from these
accounts will be made in the same manner and be subject to the same rules as set
forth under "Withdrawals" and "Surrender." In addition, the following provisions
also apply to withdrawals from a Guarantee Period Account: a) a Market Value
Adjustment will apply to all withdrawals, including Withdrawals without
Surrender Charge, unless made at the end of the Guarantee Period; and b) the
Company reserves the right to defer payments of amounts withdrawn from a
Guarantee Period Account for up to six months from the date it receives the
withdrawal request. If deferred for 30 days or more, the Company will pay
interest on the amount deferred at a rate of at least 3%.
In the event that a Market Value Adjustment applies to a withdrawal of a portion
of the value of a Guarantee Period Account, it will be calculated on the amount
requested and deducted or added to the amount remaining in the Guarantee Period
Account. If the entire amount in a Guarantee Period Account is requested, the
adjustment will be made to the amount payable. If a Contingent Deferred Sales
Charge applies to the withdrawal, it will be calculated as set forth under
"Contingent Deferred Sales Charge" after application of the Market Value
Adjustment.
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<PAGE>
FEDERAL TAX CONSIDERATIONS
The effect of federal income taxes on the value of a Contract, on withdrawals or
surrenders, on annuity benefit payments, and on the economic benefit to the
Contract Owner, Annuitant, or beneficiary depends upon a variety of factors. The
following discussion is based upon the Company's understanding of current
federal income tax laws as they are interpreted as of the date of this
Prospectus. No representation is made regarding the likelihood of continuation
of current federal income tax laws or of current interpretations by the Internal
Revenue Service (IRS).
IT SHOULD BE RECOGNIZED THAT THE FOLLOWING DISCUSSION OF FEDERAL INCOME TAX
ASPECTS OF AMOUNTS RECEIVED UNDER VARIABLE ANNUITY CONTRACTS IS NOT EXHAUSTIVE,
DOES NOT PURPORT TO COVER ALL SITUATIONS AND IS NOT INTENDED AS TAX ADVICE. A
QUALIFIED TAX ADVISER SHOULD ALWAYS BE CONSULTED WITH REGARD TO THE APPLICATION
OF LAW TO INDIVIDUAL CIRCUMSTANCES.
The Company intends to make a charge for any effect which the income, assets, or
existence of the Contracts, the Variable Account or the Subaccounts may have
upon its tax. The Variable Account presently is not subject to tax, but the
Company reserves the right to assess a charge for taxes should the Variable
Account at any time become subject to tax. Any charge for taxes will be assessed
on a fair and equitable basis in order to preserve equity among classes of
Contract Owners and with respect to each separate account as though that
separate account were a separate taxable entity.
The Variable Account is considered a part of and taxed with the operations of
the Company. The Company is taxed as a life insurance company under subchapter L
of the Code. The Company files a consolidated tax return with its affiliates.
The Internal Revenue Service has issued regulations relating to the
diversification requirements for variable annuity and variable life insurance
contracts under Section 817(h) of the Code. The regulations provide that the
investments of a segregated asset account underlying a variable annuity contract
are adequately diversified if no more than 55% of the value of its assets is
represented by any one investment, no more than 70% by any two investments, no
more than 80% by any three investments, and no more than 90% by any four
investments. If the investments are not adequately diversified, the income on a
contract, for any taxable year of the Contract Owner, would be treated as
ordinary income received or accrued by the Contract Owner. It is anticipated
that the Trust will comply with the diversification requirements.
A. QUALIFIED AND NON-QUALIFIED CONTRACTS.
From a federal tax viewpoint there are two types of variable annuity Contracts,
"qualified" Contracts and "non-qualified" Contracts. A qualified Contract is one
that is purchased in connection with a retirement plan which meets the
requirements of Sections 401, 403, 408, or 457 of the Code, while a
non-qualified Contract is one that is not purchased in connection with one of
the indicated retirement plans. The tax treatment for certain withdrawals or
surrenders will vary according to whether they are made from a qualified
Contract or a non-qualified Contract. For more information on the tax provisions
applicable to qualified Contracts, see Sections D through J, below.
B. TAXATION OF THE CONTRACTS IN GENERAL.
The Company believes that the Contracts described in this Prospectus will, with
certain exceptions (see K below), be considered annuity contracts under Section
72 of the Code. This section provides for the taxation of annuities. The
following discussion concerns annuities subject to Section 72. Section
72(e)(11)(A)(ii) requires that all non-qualified deferred annuity Contracts
issued by the same insurance company to the same Contract Owner during the same
calendar year be treated as a single Contract in determining taxable
distributions under Section 72(e).
With certain exceptions, any increase in the Accumulated Value of the Contract
is not taxable to the Contract Owner until it is withdrawn from the Contract. If
the Contract is surrendered or amounts are withdrawn prior to the Annuity Date,
any withdrawal of investment gain in value over the cost basis of the Contract
would be taxed as ordinary income. Under the current provisions of the Code,
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<PAGE>
amounts received under a non-qualified Contract prior to the Annuity Date
(including payments made upon the death of the Annuitant or Contract Owner), or
as non-periodic payments after the Annuity Date, are generally first
attributable to any investment gains credited to the Contract over the
taxpayer's basis (if any) in the Contract. Such amounts will be treated as
income subject to federal income taxation.
A 10% penalty tax may be imposed on the withdrawal of investment gains if the
withdrawal is made prior to age 59 1/2. The penalty tax will not be imposed
after age 59 1/2, or if the withdrawal follows the death of the Contract Owner
(or, if the Contract Owner is not an individual, the death of the primary
Annuitant, as defined in the Code), or in the case of the "total disability" (as
defined in the Code) of the Owner. Furthermore, under Section 72 of the Code,
this penalty tax will not be imposed, irrespective of age, if the amount
received is one of a series of "substantially equal" periodic payments made at
least annually for the life or life expectancy of the payee. This requirement is
met when the Contract Owner elects to have distributions made over the Contract
Owner's life expectancy, or over the joint life expectancy of the Contract Owner
and beneficiary. The requirement that the amount be paid out as one of a series
of "substantially equal" periodic payments is met when the number of units
withdrawn to make each distribution is substantially the same.
In a Private Letter Ruling, the IRS took the position that where distributions
from a variable annuity contract were determined by amortizing the accumulated
value of the contract over the taxpayer's remaining life expectancy (such as
under the Contract's life expectancy distribution ("LED") option), and the
option could be changed or terminated at any time, the distributions failed to
qualify as part of a "series of substantially equal payments" within the meaning
of Section 72 of the Code. The distributions were therefore subject to the 10%
federal penalty tax. This Private Letter Ruling may be applicable to a Contract
Owner who receives distributions under the LED option prior to age 59 1/2.
Subsequent private letter rulings, however, have treated LED-type withdrawal
programs as effectively avoiding the 10% penalty tax. The position of the IRS on
this issue is unclear.
If the Contract Owner transfers (assigns) the Contract to another individual as
a gift prior to the Annuity Date, the Code provides that the Contract Owner will
incur taxable income at the time of the transfer. An exception is provided for
certain transfers between spouses. The amount of taxable income upon such
taxable transfer is equal to the excess, if any, of the Surrender Value of the
Contract over the Contract Owner's cost basis at the time of the transfer. The
transfer is also subject to federal gift tax provisions. Where the Contract
Owner and Annuitant are different persons, the change of ownership of the
Contract to the Annuitant on the Annuity Date, as required under the Contract,
is a gift and will be taxable to the Contract Owner as such; however, the
Contract Owner will not incur taxable income. Instead, the Annuitant will incur
taxable income upon receipt of annuity benefit payments as discussed below.
When annuity benefit payments are commenced under the Contract, generally a
portion of each payment may be excluded from gross income. The excludable
portion is generally determined by a formula that establishes the ratio that the
cost basis of the Contract bears to the expected return under the Contract. The
portion of the payment in excess of this excludable amount is taxable as
ordinary income. Once all cost basis in the Contract is recovered, the entire
payment is taxable. If the Annuitant dies before cost basis is recovered, a
deduction for the difference is allowed on the Annuitant's final tax return.
C. TAX WITHHOLDING AND PENALTIES.
The Code requires withholding with respect to payments or distributions from
nonqualified contracts and IRAs, unless a taxpayer elects not to have
withholding. A 20% withholding requirement applies to distributions from most
other qualified contracts. In addition, the Code requires reporting to the IRS
of the amount of income received with respect to payment or distributions from
annuities.
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<PAGE>
In certain situations, the Code provides for a tax penalty if, prior to death,
disability or attainment of age 59 1/2, a Contract Owner makes a withdrawal or
receives any amount under the Contract, unless the distribution is in the form
of a life annuity (including life expectancy distributions). The penalty is 10%
of the amount includible in income by the Contract Owner.
The tax treatment of certain withdrawals or surrenders of the non-qualified
Contracts offered by this Prospectus will vary according to whether the amount
withdrawn or surrendered is allocable to an investment in the Contract made
before or after certain dates.
D. PROVISIONS APPLICABLE TO QUALIFIED EMPLOYER PLANS.
The tax rules applicable to qualified employer plans, as defined by the Code,
vary according to the type of plan and the terms and conditions of the plan
itself. Therefore, the following is general information about the use of the
Contracts with various types of qualified plans. The rights of any person to any
benefits under such qualified plans will be subject to the terms and conditions
of the qualified plans themselves regardless of the terms and conditions of the
Contract.
A loan to a participant or beneficiary from plans qualified under Sections 401
and 403 or an assignment or pledge of an interest in such a plan is generally
treated as a distribution. This general rule does not apply to loans which
contain certain repayment terms and do not exceed a specified maximum amount, as
required under Section 72(p).
E. QUALIFIED EMPLOYEE PENSION AND PROFIT SHARING TRUSTS AND QUALIFIED ANNUITY
PLANS.
When an employee (including a self-employed individual) or one or more of the
employee's beneficiaries receives a "lump sum" distribution (a distribution from
a qualified plan described in Code Section 401(a) within one taxable year equal
to the total amount payable with respect to such an employee) the taxable
portion of such distribution may qualify for special treatment under a special
five-year income averaging provision of the Code. The employee must have had at
least 5 years of participation under the plan, and the lump sum distribution
must be made after the employee has attained age 59 1/2 or on account of his or
her death, separation from the employer's service (in the case of a common-law
employee) or disability (in the case of a self-employed individual). Such
treatment can be elected for only one taxable year once the individual has
reached age 59 1/2. An employee who attained age 50 before January 1, 1986 may
elect to treat part of the taxable portion of a lump-sum distribution as
long-term capital gains and may also elect 10-year averaging instead of
five-year averaging.
The Company can provide prototype plans for certain of the pension or profit
sharing plans for review by your legal counsel. For information, ask your
financial representative.
F. SELF-EMPLOYED INDIVIDUALS.
The Self-Employed Individuals Tax Retirement Act of 1962, as amended, frequently
referred to as "H.R. 10", allows self-employed individuals and partners to
establish qualified pension and profit sharing trusts and annuity plans to
provide benefits for themselves and their employees.
These plans generally are subject to the same rules and requirements applicable
to corporate qualified plans, with some special restrictions imposed on
"owner-employees." An "owner-employee" is an employee who (1) owns the entire
interest in an unincorporated trade or business, or (2) owns more than 10% of
either the capital interest or profits interest in a partnership.
G. INDIVIDUAL RETIREMENT ACCOUNT PLANS.
Any individual who earns "compensation" (as defined in the Code and including
alimony payable under a court decree) from employment or self-employment,
whether or not he or she is covered by another qualified plan, may establish an
Individual Retirement Account or Annuity plan ("IRA") for the accumulation of
retirement savings on a tax-deferred basis. Income from investments is not
included in "compensation." The assets of an IRA may be invested in, among other
things, annuity Contracts including the Contracts offered by this Prospectus.
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<PAGE>
Contributions to the IRA may be made by the individual or on behalf of the
individual by an employer. IRA contributions may be deductible up to the lesser
of (1) $2,000 or (2) 100% of compensation. The deduction is reduced
proportionately for adjusted gross income between $40,000 and $50,000 (between
$25,000 and $35,000 for unmarried taxpayers and between $0 and $10,000 for a
married taxpayer filing separately) if the taxpayer and his or her spouse file a
joint return and either is an active participant in an employer sponsored
retirement plan.
An individual and a working spouse each may have an IRA with the above-described
limit on each. An individual with an IRA may establish an additional IRA for a
non-working spouse if they file a joint return. Contributions to the two IRAs
together are deductible up to the lesser of $2,250 or 100% of compensation.
No deduction is allowed for contributions made for the year in which the
individual attains age 70 1/2 and years thereafter. Contributions for that year
and for years thereafter will result in certain adverse tax consequences.
Non-deductible contributions may be made to IRAs until the year in which the
individual attains age 70 1/2. Although these contributions may not be deducted,
taxes on their earnings are deferred until the earnings are distributed. The
maximum permissible non-deductible contribution is $2,000 for an individual
taxpayer and $2,250 for a taxpayer and non-working spouse. These limits are
reduced by the amount of any deductible contributions made by the taxpayer.
Contributions may be made with respect to a particular year until the due date
of the individual's federal income tax return for that year, not including
extensions. However, for reporting purposes, the Company will regard
contributions as being applicable to the year made unless it receives notice to
the contrary.
All annuity benefit payments and other distributions under an IRA will be taxed
as ordinary income unless the owner has made non-deductible contributions. In
addition, a minimum level of distributions must begin no later than April 1
following the year in which the individual attains age 70 1/2, and failure to
make adequate distributions at this time may result in certain adverse tax
consequences to the individual.
Distributions from all of an individual's IRAs are treated as if they were a
distribution from one IRA and all distributions during the same taxable year are
treated as if they were one distribution. An individual who makes a
non-deductible contribution to an IRA or receives a distribution from an IRA
during the taxable year must provide certain information on the individual's tax
return to enable the IRS to determine the proportion of the IRA balance which
represents non-deductible contributions. If the required information is
provided, that part of the amount withdrawn which is proportionate to the
individual's aggregate non-deductible contributions over the aggregate balance
of all of the individual's IRAs, is excludable from income.
Distributions which are a return of a non-deductible contribution are
non-taxable, as they represent a return of basis. If the required information is
not provided to the IRS, distributions from an IRA to which both deductible and
non-deductible contributions have been made are presumed to be fully taxable.
H. SIMPLIFIED EMPLOYEE PENSIONS.
Employers may establish Simplified Employee Pensions ("SEPs") under Code Section
408(k) if certain requirements are met. A SEP is an IRA to which the employer
contributes under a written formula. Currently, a SEP may accept employer
contributions each year up to $30,000 or 15% of compensation (as defined),
whichever is less. To establish SEPs the employer must make a contribution for
every employee age 21 and over who has performed services for the employer for
at least three of the five immediately preceding calendar years and who has
earned at least $300 for the year. SEP contributions for employees over age
70 1/2 are permissible.
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The employer's contribution is excluded from the employee's gross income for the
taxable year for which it was made up to the $30,000/15% limit. In addition to
the employer's contribution, the employee may contribute 100% of the employee's
earned income, up to $2,000, to the SEP, but such contributions will be subject
to the rules described above in "G. Individual Retirement Account Plans."
These plans are subject to the general employer's deduction limitations
applicable to all corporate qualified plans.
I. PUBLIC SCHOOL SYSTEMS AND CERTAIN TAX-EXEMPT ORGANIZATIONS.
Under the provisions of Section 403(b) of the Code, payments made for annuity
Contracts purchased for employees under annuity plans adopted by public school
systems and certain organizations which are tax exempt under Section 501(c)(3)
of the Code are excludable from the gross income of such employees to the extent
that the aggregate purchase payments for such annuity Contracts in any year do
not exceed the maximum contribution permitted under the Code.
A Contract qualifying under Section 403(b) of the Code must provide that
withdrawals or other distributions attributable to salary reduction
contributions (including earnings thereon) may not begin before the employee
attains age 59 1/2, separates from service, dies, or becomes disabled. In the
case of hardship a Contract Owner may withdraw amounts contributed by salary
reduction, but not the earnings on such amounts. Even though a distribution may
be permitted under these rules (e.g., for hardship or after separation from
service), it may nonetheless be subject to a 10% penalty tax as a premature
distribution, in addition to income tax. The distribution restrictions are
effective for years beginning after December 31, 1988, but only with respect to
amounts that were not held under the Contract as of that date.
J. TEXAS OPTIONAL RETIREMENT PROGRAM.
Under a Code Section 403(b) annuity contract issued as a result of participation
in the Texas Optional Retirement Program, distributions may not be received
except in the case of the participant's death, retirement or termination of
employment in the Texas public institutions of higher education. These
restrictions are imposed by reason of an opinion of the Texas Attorney General
interpreting the Texas laws governing the Optional Retirement Program.
K. SECTION 457 PLANS FOR STATE GOVERNMENTS AND TAX-EXEMPT ENTITIES.
Code Section 457 allows employees of a state, one of its political subdivisions,
or certain tax-exempt entities to participate in eligible government deferred
compensation plans. An eligible plan, by its terms, must not allow deferral of
more than $7,500 or 33 1/3% of a participant's includible compensation for the
taxable year, whichever is less. Includible compensation does not include
amounts excludable under the eligible deferred compensation plan or amounts paid
into a Code Section 403(b) annuity. The amount a participant may defer must be
reduced dollar-for-dollar by elective deferrals under a SEP, 401(k) plan or a
deductible employee contribution to a 501(c)(18) plan. Under eligible deferred
compensation plans the state, political subdivision, or tax-exempt entity will
be owner of the Contract.
If an employee also participates in another eligible plan or contributes to a
Code Section 403(b) annuity, a single limit of $7,500 will be applied for all
plans. Additionally, the employee must designate how much of the $7,500 or
33 1/3% limitation will be allocated among the various plans. Contributions to
an eligible plan will serve to reduce the maximum exclusion allowance for a Code
Section 403(b) annuity. Amounts received by employees under such plans generally
are includible in gross income in the year of receipt.
L. NON-INDIVIDUAL OWNERS.
Non-individual Owners (e.g., a corporation) of deferred annuity contracts
generally will be currently taxed on any increase in the cash surrender value of
the deferred annuity attributable to contributions made after February 28, 1986.
This rule does not apply to immediate annuities or to deferred
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annuities held by a qualified pension plan, an IRA, a 403(b) plan, estates,
employers with respect to terminated pension plans, or a nominee or agent
holding a contract for the benefit of an individual. Corporate-owned annuities
may result in exposure to the alternative minimum tax, to the extent that income
on the annuities increases the corporation's adjusted current earnings.
REPORTS
A Contract Owner is sent a report semi-annually which states certain financial
information about the Underlying Funds. The Company will also furnish an annual
report to the Contract Owner containing a statement of his or her account,
including unit values and other information as required by applicable law, rules
and regulations.
LOANS (QUALIFIED CONTRACTS ONLY)
Loans are available to owners of TSA contracts (i.e. contracts issued under
Section 403(b) of the Code and to contracts issued to plans qualified under
Sections 401(a) and 401(k) of the Code. Loans are subject to provisions of the
Code and to applicable qualified retirement plan rules. Tax advisors and plan
fiduciaries should be consulted prior to exercising loan privileges.
Loaned amounts will first be withdrawn from Sub-Account and Fixed Account values
on a pro-rata basis until exhausted. Thereafter, any additional amounts will be
withdrawn from the Guarantee Period Accounts (pro-rata by duration and LIFO
(last-in, first-out) within each duration), subject to any applicable Market
Value Adjustments. The maximum loan amount will be determined under the
Company's maximum loan formula. The minimum loan amount is $1,000. Loans will be
secured by a security interest in the contract and the amount borrowed will be
transferred to a loan asset account within the Company's General Account, where
it will accrue interest at a specified rate below the then-current loan rate.
Generally, loans must be repaid within five years or less and repayments must be
made quarterly and in substantially equal amounts. Repayments will be allocated
pro-rata in accordance with the most recent payment allocation, except that any
allocations to a Guarantee Period Account will instead be allocated to the Money
Market Sub-Account.
CHANGES IN OPERATION OF THE VARIABLE ACCOUNT
The Company reserves the right, subject to compliance with applicable law, to
(1) transfer assets from any separate account or Sub-Account to another of the
Company's variable accounts or Sub-Accounts having assets of the same class, (2)
to operate the variable account or any Sub-Account as a management investment
company under the 1940 Act or in any other form permitted by law, (3) to
deregister the Variable account under the 1940 Act in accordance with the
requirements of the 1940 Act and (4) to substitute the shares of any other
registered investment company for the Underlying Fund shares held by a
Sub-Account, in the event that Underlying Fund shares are unavailable for
investment, or if the Company determines that further investment in such
Underlying Fund shares is inappropriate in view of the purpose of the
Sub-Account (5) to change the methodology for determining the net investment
factor, and (6) to change the names of the Variable Account or of the Sub-
Accounts. In no event will the changes described above be made without notice to
Contract Owners in accordance with the 1940 Act.
LEGAL MATTERS
There are no legal proceedings pending to which the Variable Account is a party.
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 in this
Prospectus pursuant to the rules and regulations of the Commission. The omitted
information may be obtained from the Commission's principal office in
Washington, D.C., upon payment of the Commission's prescribed fees.
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APPENDIX A
MORE INFORMATION ABOUT THE FIXED ACCOUNT
Because of exemption and exclusionary provisions in the securities laws,
interests in the Fixed Account are not generally subject to regulation under the
provisions of the Securities Act of 1933 or the Investment Company Act of 1940.
Disclosures regarding the fixed portion of the annuity contract and the Fixed
Account may be subject to the provisions of the Securities Act of 1933
concerning the accuracy and completeness of statements made in the Prospectus.
The disclosures in this APPENDIX A have not been reviewed by the Securities and
Exchange Commission.
The Fixed Account is made up of all of the general assets of the Company other
than those allocated to the separate account. Allocations to the Fixed Account
become part of the assets of the Company and are used to support insurance and
annuity obligations. A portion or all of net purchase payments may be allocated
to accumulate at a fixed rate of interest in the Fixed Account. Such net amounts
are guaranteed by the Company as to principal and a minimum rate of interest.
Under the Contracts, the minimum interest which may be credited on amounts
allocated to the Fixed Account is 3% compounded annually. Additional "Excess
Interest" may or may not be credited at the sole discretion of the Company.
If a Contract is surrendered, or if an Excess Amount is withdrawn, while the
Contract is in force and before the Annuity Date, a contingent deferred sales
charge is imposed if such event occurs before the payments attributable to the
surrender or withdrawal have been credited to the Contract less than seven full
contract years.
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APPENDIX B
SURRENDER CHARGES AND THE MARKET VALUE ADJUSTMENT
PART 1: SURRENDER CHARGES
FULL SURRENDER
Assume a payment of $50,000 is made on the Date of Issue and no additional
payments are made. Assume there are no withdrawals and that the Withdrawal
Without Surrender Charge amount is equal to the greater of 15% of the current
Accumulated Value, or the accumulated earnings in the Contract. The table below
presents examples of the surrender charge resulting from a full surrender, based
on Hypothetical Accumulated Values.
<TABLE>
<CAPTION>
WITHDRAWAL
HYPOTHETICAL WITHOUT SURRENDER
ACCUMULATED SURRENDER CHARGE SURRENDER
ACCOUNT YEAR VALUE CHARGE PERCENTAGE CHARGE
- ------------- ------------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
1 $ 54,000.00 $ 8,100.00 7% $ 3,213.00
2 58,320.00 8,748.00 6% 2,974.32
3 62,985.60 12,985.60 5% 2,500.00
4 68,024.45 18,024.45 4% 2,000.00
5 73,466.40 23,466.40 3% 1,500.00
6 79,343.72 29,343.72 2% 1,000.00
7 85,691.21 35,691.21 1% 500.00
8 92,546.51 42,546.51 0% 0.00
</TABLE>
WITHDRAWALS
Assume a payment of $50,000 is made on the Date of Issue and no additional
payments are made. Assume that the Withdrawal Without Surrender Charge is equal
to the greater of 15% of the current Accumulated Value or the accumulated
earnings in the contract and there are withdrawals as detailed below. The table
below presents examples of the surrender charge resulting from withdrawals,
based on Hypothetical Accumulated Values.
<TABLE>
<CAPTION>
WITHDRAWAL
HYPOTHETICAL WITHOUT SURRENDER
ACCUMULATED SURRENDER CHARGE SURRENDER
ACCOUNT YEAR VALUE WITHDRAWALS CHARGE PERCENTAGE CHARGE
- ------------- ------------- ------------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
1 $ 54,000.00 $ 0.00 $ 8,100.00 7% $ 0.00
2 58,320.00 0.00 8,748.00 6% 0.00
3 62,985.60 0.00 12,985.60 5% 0.00
4 68,024.45 30,000.00 18,024.45 4% 479.02
5 41,066.40 10,000.00 6,159.96 3% 115.20
6 33,551.72 5,000.00 5,032.76 2% 0.00
7 30,835.85 10,000.00 4,625.38 1% 53.75
8 22,502.72 15,000.00 3,375.41 0% 0.00
</TABLE>
PART 2: MARKET VALUE ADJUSTMENT
The market value factor is: [(1+i)/(1+j)]n/365-1
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The following examples assume:
1. The payment was allocated to a ten year Guarantee Period Account with a
Guaranteed Interest Rate of 8%.
2. The date of surrender is seven years (2555 days) from the expiration
date.
3. The value of the Guarantee Period Account is equal to $62,985.60 at the
end of three years.
4. No transfers of withdrawals affecting this Guarantee Period Account have
been made.
5. Surrender charges, if any, are calculated in the same manner as shown in
the examples in Part 1.
NEGATIVE MARKET VALUE ADJUSTMENT (UNCAPPED)
Assume that on the date of surrender, the current rate (j) is 10.00% or 0.10
<TABLE>
<S> <C> <C>
The market value factor = [(1+i)/(1+j)]n/365-1
= [(1+.08)/(1+.10)]2555/365-1
= (.98182)7-1
= -.12054
The market value adjustment = the market value factor multiplied by the
withdrawal
= -.12054*$62,985.60
= -$7,592.11
</TABLE>
POSITIVE MARKET VALUE ADJUSTMENT (UNCAPPED)
Assume that on the date of surrender, the current rate (j) is 7.00% or 0.07
<TABLE>
<S> <C> <C>
The market value factor = [(1+i)/(1+j)]n/365-1
= [(1+.08)/(1+.07)]2555/365-1
= (1.0093)7-1
= .06694
The market value adjustment = the market value factor multiplied by the
withdrawal
= .06694*$62,985.60
= $4,216.26
</TABLE>
NEGATIVE MARKET VALUE ADJUSTMENT (CAPPED)
Assume that on the date of surrender, the current rate (j) is 11.00% or 0.11
<TABLE>
<S> <C> <C>
The market value factor = [(1+i)/(1+j)]n/365-1
= [(1+.08)/(1+.11)]2555/365-1
= (.97297)7-1
= -.17454
The market value adjustment = Minimum of the market value factor
multiplied by the withdrawal or the
negative of the excess interest earned
over 3%
= Minimum of (-.17454*$62,985.60 or
-$8,349.25)
= Minimum of (-$10,993.51 or -$8,349.25)
= -$8,349.25
</TABLE>
42
<PAGE>
POSITIVE MARKET VALUE ADJUSTMENT (CAPPED)
Assume that on the date of surrender, the current rate (j) is 6.00% or 0.06
<TABLE>
<S> <C> <C>
The market value factor = [(1+i)/(1+j)]n/365-1
= [(1+.08)/(1+.06)]2555/365-1
= (1.01887)7-1
= .13981
The market value adjustment = Minimum of the market value factor
multiplied by the withdrawal or the
excess interest earned over 3%
= Minimum of (.13981*$62,985.60 or
$8,349.25)
= Minimum of ($8,806.02 or $8,349.25)
= $8,349.25
</TABLE>
43
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
STATEMENT OF ADDITIONAL INFORMATION
FOR
GROUP AND INDIVIDUAL VARIABLE ANNUITY CONTRACTS FUNDED THROUGH SUB-ACCOUNT(S) OF
SEPARATE ACCOUNT VA-K
INVESTING IN SHARES OF DELAWARE GROUP PREMIUM FUND, INC.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS. IT SHOULD BE
READ IN CONJUNCTION WITH THE PROSPECTUS OF THE VARIABLE ACCOUNT DATED JULY 8,
1996 ("THE PROSPECTUS"). THE PROSPECTUS MAY BE OBTAINED FROM ANNUITY CUSTOMER
SERVICES, FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY, 440 LINCOLN
STREET, WORCESTER, MASSACHUSETTS 01653.
DATED April 30, 1996
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
GENERAL INFORMATION AND HISTORY ............................................. 2
TAXATION OF THE CONTRACT, THE VARIABLE ACCOUNT AND THE COMPANY .............. 2
SERVICES .................................................................... 3
UNDERWRITERS ................................................................ 3
ANNUITY PAYMENTS ............................................................ 4
PERFORMANCE INFORMATION ..................................................... 5
FINANCIAL STATEMENTS ........................................................ 8
GENERAL INFORMATION AND HISTORY
Separate Account VA-K ("Variable Account") is a separate investment account
of First Allmerica Financial Life Insurance Company ("the Company")
established pursuant to a vote of the Board of Directors on August 20, 1991.
The Company, organized under the laws of Massachusetts in 1844, is the fifth
oldest life insurance company in America. As of December 31, 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 in Massachusetts. In addition, the Company is subject to the
insurance laws and regulations of other state and jurisdictions in which it
is licensed to operate.
Currently, ten Sub-Account(s) of the Variable Account are available under
the Contracts. Each Sub-Account(s) invests in a corresponding investment
portfolio of Delaware Group Premium Fund, Inc. (the "Fund").
The Fund is an open-end, diversified series investment company. The Fund
currently consists of ten different investment portfolios: the Equity-Income
Series, High Yield Series, Capital Reserves Series, Money Market Series,
Growth Series, Multiple Strategy Series, Value Series, Emerging Growth Series,
Global Bond Series and International Equity Series ("Underlying Series"). Each
Underlying Series has its own investment objectives and certain attendant risks.
TAXATION OF THE POLICIES, SEPARATE
ACCOUNT AND THE COMPANY
The Company currently imposes no charge for taxes payable in connection with
the Contracts, other than for state and local premium taxes and similar
assessments when applicable. The Company reserves the right to impose a
charge for
-2-
<PAGE>
any other taxes that may become payable in the future in connection with the
Contracts or the Variable Account.
The Variable Account is considered to be a part of and taxed with the
operations of the Company. The Company is taxed as a mutual life insurance
company under subchapter L of the Code and files a consolidated tax return
with its affiliated companies.
The Company reserves the right to make a change for any effect which the
income, assets, or existence of Contracts or the Variable Account may have
upon its tax. Such charge for taxes, if any, will be assessed on a fair and
equitable basis in order to preserve equity among classes of Contract Owners.
The Variable Account presently is not subject to tax.
SERVICES
CUSTODIAN OF SECURITIES. The Company serves as custodian of the assets of the
Variable Account. Fund shares owned by the Sub-account(s) are held on an open
account basis. A Sub-account's ownership of Fund shares is reflected on the
records of the Fund and not represented by any transferable stock
certificates.
EXPERTS. 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 Separate Account VA-K Delaware Medallion of First Allmerica Financial
Life Insurance Company as of December 31, 1995 and for the periods indicated,
included in this Statement of Additional Information constituting part of the
Registration Statement, have been so included in reliance on the report of
Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
The financial statements of the Company included herein should be considered
only as bearing on the ability of the Company to meet its obligations under
the Contracts.
UNDERWRITERS
Allmerica Investments, Inc., a registered broker-dealer under the Securities
Exchange Act of 1934 and a member of the National Association of Securities
Dealers, Inc. (NASD), serves as principal underwriter and general distributor
for the Contracts pursuant to a contract between Allmerica Investments, Inc.,
the Company and the Separate Account. Allmerica Investments, Inc. distributes
the Contracts on a best efforts basis. Allmerica Investments, Inc., 440
Lincoln Street, Worcester, Massachusetts 01653 was organized in 1969 as a
wholly-owned subsidiary of the Company and is, at present, indirectly
wholly-owned by the Company.
The Contracts offered by this Prospectus are offered continuously and may be
purchased from certain independent broker-dealers which are NASD members and
whose representatives are authorized by applicable law to sell variable
annuity policies.
All persons selling the Contracts are required to be licensed by their
respective state insurance authorities for the sale of variable annuity
policies. Commissions are paid by the Company on sales of the Contracts. For
the first $100 million of total purchase payments, commissions will equal
7.00% of purchase payments; thereafter, commissions will equal 6.75% of
purchase payments. Commissions not to exceed 6.5% of purchase payments will
be paid to entities which sell the Contracts. The remaining commissions
payable by the Company on sales of the Contracts will be paid, pursuant to a
Wholesaler Agreement among the Company, Allmerica Investments, Inc. and
Delaware Distributors, Inc. ("Delaware Distributors"), to Delaware
Distributors, a registered broker-dealer under the Securities Exchange Act of
1934, a member of the NASD and an affiliate of Delaware Management Company,
Inc. and the Fund. To the extent permitted under NASD rules, expense
reimbursement allowances may be paid and additional payments for other
services not directly related to the sale of the Contracts, including the
recruitment and training of personnel, production of promotional literature
and similar services may be made.
Commissions paid by the Company do not result in any charge to Contract Owners
or to the Variable Account in addition to the charges described under "CHARGES
AND DEDUCTIONS" in the Prospectus. The Company intends to recoup
-3-
<PAGE>
the commission and other sales expense through a combination of anticipated
surrender, partial redemption and/or annuitization charges, the investment
earnings on amounts allocated to accumulate on a fixed basis in excess of the
interest credited on fixed accumulations by the Company, and the profit, if
any, from the mortality and expense risk charge.
The aggregate amount of commissions paid with respect to sales of the
Contracts was $1,409,730.32 for Delaware Distributors, Inc. in 1995. Sales of
the Contracts began in April 1995.
ANNUITY PAYMENTS
The method by which the Accumulated Value under the Policy is determined is
described in detail under "K. Computation of Policy Values and Annuity
Payments" in the Prospectus.
ILLUSTRATION OF ACCUMULATION UNIT CALCULATION USING HYPOTHETICAL EXAMPLE. The
Accumulation Unit calculation for a daily Valuation Period may be illustrated
by the following hypothetical example: Assume that the assets of a
Sub-account(s) at the beginning of a one-day Valuation Period were
$5,000,000; that the value of an Accumulation Unit on the previous date was
$1.135000; and that during the Valuation Period, the investment income and
net realized and unrealized capital gains exceed net realized and unrealized
capital losses by $1,675. The Accumulation Unit value at the end of the
current Valuation Period would be calculated as follows:
<TABLE>
<S> <C>
(1) Accumulation Unit Value - Previous Valuation Period .............. $1.135000
(2) Value of Assets - Beginning of Valuation Period .................. $5,000,000
(3) Excess of investment income and net gains over capital losses .... $1,675
(4) Adjusted Gross Investment Rate for the valuation period (3):(2)... 0.000335
(5) Annual Charge (one day equivalent of 1.40% per annum) ............ 0.000038
(6) Net Investment Rate (4)-(5) ...................................... 0.000297
(7) Net Investment Factor 1.000000 + (6) ............................. 1.000297
(8) Accumulation Unit Value - Current Period (1)x(7) ................. $1.135337
</TABLE>
Conversely, if unrealized capital losses and charges for expenses and taxes
exceeded investment income and net realized capital gains by $1,675, the
accumulated unit value at the end of the Valuation Period would have been
$1.134577.
The method for determining the amount of annuity payments is described in
detail under "K. Computation of Policy Values and Annuity Payments" in the
Prospectus.
ILLUSTRATION OF VARIABLE ANNUITY CALCULATION USING HYPOTHETICAL EXAMPLE. The
determination of the Annuity Unit value and the variable annuity payment may
be illustrated by the following hypothetical example. Assume an Annuitant has
40,000 Accumulation Units in a Separate Account, and that the value of an
Accumulation Unit on the Valuation Date used to determine the amount of the
first variable annuity payment is $1.120000. Therefore, the Accumulation
Value of the Contract if $44,800 (40,000x$1.120000). Assume also that the
Contract Owner elects an option for which the first monthly payment is $6.57
per $1,000 of Accumulated Value applied. Assuming no premium tax or
contingent deferred sale charge, the first monthly payment would be 44.800
multiplied by $6.57, or $294.34.
Next, assume that the Annuity Unit value for the assumed rate of 3-1/2% per
annum for the Valuation Date as of which
-4-
<PAGE>
the first payment was calculated was $1.100000. Annuity Unit values will not
be the same as Accumulation Unit values because the former reflect the 3-1/2%
assumed interest rate used in the annuity rate calculations. When the Annuity
Unit value of $1.100000 is divided into the first monthly payment the number
of Annuity Units represented by that payment is determined to be 267.5818.
The value of this same number of Annuity Units will be paid in each
subsequent month under most options. Assume further that the net investment
factor for the Valuation Period applicable to the next annuity payment is
1.000190. Multiplying this factor by .999906 (the one-day adjustment factor
for the assumed interest rate of 3-1/2% per annum) produces a factor of
1.000096. This is then multiplied by the Annuity Unit value on the
immediately preceding Valuation Date (assumed here to be $1.105000). The
result is an Annuity Unit value of $1.105106 for the current monthly payment.
The current monthly payment is then determined by multiplying the number of
Annuity Units by the current Annuity Unit value, or 267.5818 times $1.105106,
which produces a current monthly payment of $295.71.
PERFORMANCE INFORMATION
Performance information for a Sub-account(s) may be compared, in reports and
promotional literature, to certain indices described in the prospectus under
"PERFORMANCE INFORMATION." In addition, the Company may provide advertising,
sales literature, periodic publications or other materials information on
various topics of interest to Contract Owners and prospective Contract
Owners. These topics may include the relationship between sectors of the
economy and the economy as a whole and its effect on various securities
markets, investment strategies and techniques (such as value investing,
market timing, dollar cost averaging, asset allocation, constant ratio
transfer and account rebalancing), the advantages and disadvantages of
investing in tax-deferred and taxable investments, customer profiles and
hypothetical purchase and investment scenarios, financial management and tax
and retirement planning, and investment alternatives to certificates of
deposit and other financial instruments, including comparisons between the
Contracts and the characteristics of and market for such financial
instruments.
Policy Form A has been offered since April 1, 1994. However, total return
data may be advertised based on the period of time that the Underlying Series
have been in existence. The results for any period prior to the Contracts
being offered will be calculated as if the Contracts had been offered during
that period of time, with all charges assumed to be those applicable to the
Contracts.
TOTAL RETURN
"Total Return" refers to the total of the income generated by an investment
in a Sub-Account(s) and of the changes of value of the principal invested
(due to realized and unrealized capital gains or losses) for a specified
period, reduced by the Sub-Account(s) asset charge and any applicable
contingent deferred sales charge which would be assessed upon complete
withdrawal of the investment.
Total Return figures are calculated by standardized methods prescribed by
rules of the Securities and Exchange Commission. The quotations are computed
by finding the average annual compounded rates of return over the specified
periods that would equate the initial amount invested to the ending
redeemable values, according to the following formula:
n
P(1 + T) = ERV
Where: P = a hypothetical initial payment to the Separate Account of $1,000
T = average annual total return
n = number of years
ERV = the ending redeemable value of the $1,000 payment at the end of
the specified period
-5-
<PAGE>
The calculation of Total Return includes the annual charges against the asset
of the Sub-Account(s). This charge is 1.40% on an annual basis. The calculation
of ending redeemable value assumes (1) the policy was issued at the beginning
of the period and (2) a complete surrender of the policy at the end of the
period. The deduction of the contingent deferred sales charge, if any,
applicable at the end of the period is included in the calculation, according
to the following schedule:
POLICY YEAR FROM DATE OF CHARGE AS PERCENTAGE OF NEW
PAYMENT IN WHICH SURRENDER OCCURS PURCHASE PAYMENTS WITHDRAWN*
--------------------------------- ---------------------------
0-1 7%
2 6%
3 5%
4 4%
5 3%
6 2%
7 1%
Thereafter 0%
*Subject to the maximum limit described in the prospectus.
No contingent deferred sale charge is deducted upon expiration of the periods
specified above. In all Policy Years after the first Policy Year, an amount
equal to 10% of the Accumulated Value under the Policy (or a greater amount
under a life expectancy distribution option, if applicable) is not subject to
the contingent deferred sales charge.
The calculations of Total Return include the deduction of the $30 Annual
Policy fee.
-6-
<PAGE>
SUPPLEMENTAL TOTAL RETURN INFORMATION
The Supplemental Total Return information in this section refers to the total
of the income generated by an investment in a Sub-Account(s) and of the changes
of value of the principal invested (due to realized and unrealized capital
gains or losses) for a specified period reduced by the Sub-Account's asset
charges. However, it is assumed that the investment is NOT withdrawn at the
end of each period.
The quotations of Supplemental Total Return are computed by finding the
average annual compounded rates of return over the specified period that
would equate the initial amount invested to the ending values, according to
the following formula:
n
P(1 + T) = EV
Where: P = a hypothetical initial payment to the Separate Account of $1,000
T = average annual total return
n = number of years
EV = the ending value of the $1,000 payment at the end of the
specified period
The calculation of Supplemental Total Return reflects the 1.40% annual charge
against the assets of the Sub-Account(s). The ending value assumes that the
policy is NOT withdrawn at the end of the specified period, and there is
therefore no adjustment for the contingent deferred sales charge that would
be applicable if the policy was withdrawn at the end of the period.
The calculations of Supplemental Total Return includes the deduction of the
$30 Annual Policy fee.
-7-
<PAGE>
YIELD AND EFFECTIVE YIELD - SUB-ACCOUNT(S) 204 (INVESTS IN THE MONEY MARKET
SERIES OF THE FUND)
Set forth below is yield and effective yield information for Subaccount 204
for the seven-day period ended December 31, 1995:
Yield 5.69%
Effective Yield 5.53%
The yield and effective yield figures are calculated by standardized methods
prescribed by rules of the Securities and Exchange Commission. Under those
methods, the yield quotation is computed by determining the net change
(exclusive of capital changes) in the value of a hypothetical pre-existing
account having a balance of one accumulation unit of the Sub-Account(s) at the
beginning of the period, subtracting a charge reflecting the annual 1.40%
deduction for mortality and expense risk and the administrative charge,
dividing the difference by the value of the account at the beginning of the
same period to obtain the base period return, and then multiplying the return
for a seven-day base period by (365/7), with the resulting yield carried to
the nearest hundredth of one percent.
Sub-account 204 computes effective yield by compounding the unannualized base
period return by using the formula:
(365/7)
Effective Yield = [(base period return +1) ] - 1
The calculation of yield and effective yield do NOT reflect the $30 Annual
Policy fee.
FINANCIAL STATEMENTS
Financial Statements are included for First Allmerica Financial Life
Insurance Company and for the Sub-Account(s) of Separate Account VA-K investing
in shares of the Underlying Series.
-8-
<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
Boston, Massachusetts
February 5, 1996
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Allmerica Financial Corporation)
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Years Ended December 31
(In millions, except per share data) 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
<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.
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Allmerica Financial Corporation)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
(In millions, except per share data) 1995 1994
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
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.
2
<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
(In millions) 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
<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.
3
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Allmerica Financial Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended December 31
(In millions) 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
<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.
4
<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.
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
5
<PAGE>
(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 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.
6
<PAGE>
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 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.
7
<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 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.
8
<PAGE>
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.
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
(In millions) 1995
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
AVAILABLE-FOR-SALE Gross Gross
Amortized Unrealized Unrealized Fair
Cost (1) Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S. government and agency securities $ 377.0 $ 21.0 $ -- $ 398.0
States and political subdivisions 2,110.6 60.7 4.0 2,167.3
Foreign governments 60.6 3.4 0.6 63.4
Corporate fixed maturities 4,582.1 200.8 16.4 4,766.5
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>
9
<PAGE>
<TABLE>
<CAPTION>
December 31
(In millions) 1994
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
AVAILABLE-FOR-SALE Gross Gross
Amortized Unrealized Unrealized Fair
Cost (1) Gains Losses Value
<S> <C> <C> <C> <C>
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.
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.
10
<PAGE>
<TABLE>
<CAPTION>
December 31
(In millions) 1995
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
Available-for-Sale
Amortized Fair
Cost Value
<S> <C> <C>
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
(In millions)
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
Proceeds from Sales
of Available-for-Sale Gross Gross
1995 Securities Gains Losses
<S> <C> <C> <C>
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>
Unrealized gains and losses on available-for-sale and other securities, are
summarized as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31
(In millions)
Equity
Fixed Securities
Maturities and Other (1) Total
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
<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.
11
<PAGE>
B. MORTGAGE LOANS AND REAL ESTATE
FAFLIC's mortgage loans and real estate are diversified by property type and
location. Real estate investments have been obtained primarily through
foreclosure. Mortgage loans are collateralized by the related properties and
generally are no more than 75% of the property's value at the time the original
loan is made.
The carrying values of mortgage loans and real estate investments net of
applicable reserves were as follows:
<TABLE>
<CAPTION>
December 31
(In millions) 1995 1994
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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
(In millions) 1995 1994
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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 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.
12
<PAGE>
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
(In millions)
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
1995 Balance at Balance at
January 1 Additions Deductions December 31
<S> <C> <C> <C> <C>
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
(In millions) 1995 1994 1993
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
<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>
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
13
<PAGE>
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
(In millions) 1995 1994 1993
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
<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
(In millions) 1995 1994 1993
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
<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 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
(In millions) 1995 1994 1993
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
<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
14
<PAGE>
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.
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
(In millions) 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
<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>
15
<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>
(In millions) 1995
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
December 31 September 30
<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>
<TABLE>
<CAPTION>
Period from October 1 through December 31
(In millions) 1995
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
<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.
16
<PAGE>
7. DEBT
Short- and long-term debt consisted of the following:
<TABLE>
<CAPTION>
December 31
(In millions) 1995 1994
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
<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>
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
(In millions) 1995 1994 1993
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
<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
(In millions) 1995 1994 1993
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
<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, 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.
17
<PAGE>
The deferred income tax asset represents the tax effects of temporary
differences attributable to Allmerica P&C, a separate consolidated group for
federal tax return purposes. Its components were as follows:
<TABLE>
<CAPTION>
December 31
(In millions) 1995 1994
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
<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
(In millions) 1995 1994
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
<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.
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.
18
<PAGE>
Components of net pension expense were as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31
(In millions) 1995 1994 1993
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
<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>
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
(In millions) 1995 1994
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
<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 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.
19
<PAGE>
The plans' funded status reconciled with amounts recognized in the
Company's consolidated balance sheet were as follows:
<TABLE>
<CAPTION>
December 31
(In millions) 1995 1994
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
<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
(In millions) 1995 1994 1993
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
<S> <S> <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 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
20
<PAGE>
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 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.
21
<PAGE>
Summarized below is financial information with respect to business segments
for the year ended and as of December 31.
<TABLE>
<CAPTION>
(In millions) 1995 1994 1993
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
<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.
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
22
<PAGE>
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.
The effects of reinsurance were as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31
(In millions) 1995 1994 1993
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
<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>
23
<PAGE>
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
(In millions) 1995 1994 1993
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
<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>
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
(In millions) 1995 1994 1993
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
<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
24
<PAGE>
$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.
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.
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.
25
<PAGE>
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>
(In millions) 1995 1994 1993
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
<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
(In millions)
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1995 March 31 June 30 Sept. 30 Dec. 31
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>
26
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
SEPARATE ACCOUNT VA-K - DELAWARE MEDALLION
- ------------------------------------------------------------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES o DECEMBER 31, 1995
- ------------------------------------------------------------------------------------------------------------------------------------
DGPF EQUITY INCOME DGPF HIGH YIELD DGPF CAPITAL RESERVES
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
201 202 203
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS:
Investment in shares of Delaware Group Premium Fund, Inc... $ 905,342 $ 526,739 $ 216,759
Accrued investment income.................................. -- 4,316 1,176
Receivable from First Allmerica Financial Life Insurance
Company (Sponsor)........................................ -- -- --
---------- ---------- ----------
Total assets............................................ 905,342 531,055 217,935
LIABILITIES:
Payable to First Allmerica Financial Life Insurance
Company (Sponsor)........................................ 86 455 152
---------- ---------- ----------
Net assets.............................................. $ 905,256 $ 530,600 $ 217,783
========== ========== ==========
Net asset distribution by category:
Qualified variable annuity policies..................... $ 216,418 $ 133,378 $ 56,299
Non-qualified variable annuity policies.................... 682,639 397,222 160,853
Value of annuitant mortality fluctuation reserve........ 6,199 -- 631
---------- ---------- ----------
$ 905,256 $ 530,600 $ 217,783
========== ========== ==========
Qualified units outstanding, December 31, 1995............. 160,208 119,527 50,490
Net asset value per qualified unit, December 31, 1995...... $ 1.350853 $ 1.115881 $ 1.115060
Non-qualified units outstanding, December 31, 1995......... 509,928 355,971 144,821
Net asset value per non-qualified unit, December 31, 1995.. $ 1.350853 $ 1.115881 $ 1.115060
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
SEPARATE ACCOUNT VA-K - DELAWARE MEDALLION
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
DGPF MONEY MARKET DGPF GROWTH DGPF MULTIPLE STRATEGY DGPF INTERNATIONAL EQUITY DGPF VALUE DGPF EMERGING GROWTH
Sub-Account SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
204 205 206 207 208 209
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 133,316 $ 386,809 $ 376,076 $ 404,219 $ 178,747 $ 2,088,372
416 -- -- -- -- --
-- -- 844 -- -- --
----------- ----------- ----------- ----------- ----------- -----------
133,732 386,809 376,920 404,219 178,747 2,088,372
116 447 -- 298 208 2,435
----------- ----------- ----------- ----------- ----------- -----------
$ 133,616 $ 386,362 $ 376,920 $ 403,921 $ 178,539 $ 2,085,937
=========== =========== =========== =========== =========== ===========
$ 76,896 $ 85,354 $ 159,725 $ 97,799 $ 50,251 $ 230,376
56,720 301,008 212,048 306,122 128,288 1,855,561
-- -- 5,147 -- -- --
----------- ----------- ----------- ----------- ----------- -----------
$ 133,616 $ 386,362 $ 376,920 $ 403,921 $ 178,539 $ 2,085,937
=========== =========== =========== =========== =========== ===========
72,602 66,304 129,030 86,700 41,073 164,130
$ 1.059144 $ 1.287300 $ 1.237893 $ 1.128009 $ 1.223470 $ 1.403619
53,553 233,829 175,456 271,382 104,856 1,321,983
$ 1.059144 $ 1.287300 $ 1.237893 $ 1.128009 $ 1.223470 $ 1.403619
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
SEPARATE ACCOUNT VA-K - DELAWARE MEDALLION
- ------------------------------------------------------------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995
- ------------------------------------------------------------------------------------------------------------------------------------
DGPF EQUITY INCOME DGPF HIGH YIELD DGPF CAPITAL RESERVES
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
201 202 203
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends............................................... $ 29,997 $ 42,351 $ 14,032
--------- --------- --------
EXPENSES:
Mortality and expense risk fees......................... 8,484 5,356 2,627
Administrative expense charges.......................... 1,018 643 315
--------- --------- --------
Total expenses........................................ 9,502 5,999 2,942
--------- --------- --------
Net investment income (loss)............................ 20,495 36,352 11,090
--------- --------- --------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Net realized gain (loss)................................ 5,641 (187) 413
Net unrealized gain..................................... 170,938 16,380 12,699
--------- --------- --------
Net realized and unrealized gain on investments......... 176,579 16,193 13,112
--------- --------- --------
Net increase in net assets from operations.............. $ 197,074 $ 52,545 $ 24,202
========= ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
SEPARATE ACCOUNT VA-K - DELAWARE MEDALLION
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
DGPF MONEY MARKET DGPF GROWTH DGPF MULTIPLE STRATEGY DGPF INTERNATIONAL EQUITY DGPF VALUE DGPF EMERGING GROWTH
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
204 205 206 207 208 209
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 21,887 $ 883 $ 7,013 $ 5,265 $ 1,676 $ 868
-------- -------- -------- -------- -------- ---------
5,092 3,007 3,555 3,888 1,693 16,197
611 361 427 467 203 1,944
-------- -------- -------- -------- -------- ---------
5,703 3,368 3,982 4,355 1,896 18,141
-------- -------- -------- -------- -------- ---------
16,184 (2,485) 3,031 910 (220) (17,273)
-------- -------- -------- -------- -------- ---------
-- 2,996 601 4,980 439 60,055
-- 57,459 60,400 30,085 28,565 400,647
-------- -------- -------- -------- -------- ---------
-- 60,455 61,001 35,065 29,004 460,702
-------- -------- -------- -------- -------- ---------
$ 16,184 $ 57,970 $ 64,032 $ 35,975 $ 28,784 $ 443,429
======== ======== ======== ======== ======== =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
SEPARATE ACCOUNT VA-K - DELAWARE MEDALLION
- ------------------------------------------------------------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------------------
DGPF EQUITY INCOME DGPF HIGH YIELD
SUB-ACCOUNT 201 SUB-ACCOUNT 202
YEAR ENDED PERIOD FROM YEAR ENDED PERIOD FROM
12/31/95 4/28/94* TO 12/31/94 12/31/95 5/20/94* TO 12/31/94
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS:
Net investment income (loss)................................... $ 20,495 $ 2,349 $ 36,352 $ 11,424
Net realized gain (loss) from security transactions............ 5,641 (688) (187) (599)
Net unrealized gain (loss) on investments...................... 170,938 (7,982) 16,380 (13,447)
--------- --------- --------- ---------
Net increase (decrease) in net assets from operations.......... 197,074 (6,321) 52,545 (2,622)
--------- --------- --------- ---------
FROM CAPITAL TRANSACTIONS:
Net purchase payments.......................................... 70,312 47,639 69,870 34
Terminations................................................... (61,226) -- (9,393) (18,704)
Other transfers from (to) the General Account of
First Allmerica Financial Life Insurance Company(Sponsor)...... 241,323 416,455 136,481 302,389
--------- --------- --------- ---------
Net increase (decrease) in net assets from capital transactions 250,409 464,094 196,958 283,719
--------- --------- --------- ---------
Net increase (decrease) in net assets.......................... 447,483 457,773 249,503 281,097
NET ASSETS:
Beginning of year.............................................. 457,773 -- 281,097 --
--------- --------- --------- ---------
End of year.................................................... $ 905,256 $ 457,773 $ 530,600 $ 281,097
========= ========= ========= =========
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
SEPARATE ACCOUNT VA-K - DELAWARE MEDALLION
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
DGPF CAPITAL RESERVES DGPF MONEY MARKET DGPF GROWTH
SUB-ACCOUNT 203 SUB-ACCOUNT 204 SUB-ACCOUNT 205
YEAR ENDED PERIOD FROM YEAR ENDED PERIOD FROM YEAR ENDED PERIOD FROM
12/31/95 6/22/94* TO 12/31/94 12/31/95 4/6/94* TO 12/31/94 12/31/95 4/19/94* TO 12/31/94
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 11,090 $ 4,138 $ 16,184 $ 4,886 $ (2,485) $ (996)
413 (431) -- -- 2,996 (1,184)
12,699 (5,626) -- -- 57,459 (1,376)
--------- --------- --------- --------- --------- ---------
24,202 (1,919) 16,184 4,886 57,970 (3,556)
--------- --------- --------- --------- --------- ---------
32,527 22,500 1,358,452 2,603,547 45,781 15,231
(960) (80) (1,147) (2,571) (17,186) (13,006)
(17,104) 158,617 (1,547,485) (2,298,250) 149,173 151,955
--------- --------- --------- --------- --------- ---------
14,463 181,037 (190,180) 302,726 177,768 154,180
--------- --------- --------- --------- --------- ---------
38,665 179,118 (173,996) 307,612 235,738 150,624
179,118 -- 307,612 -- 150,624 --
--------- --------- --------- --------- --------- ---------
$ 217,783 $ 179,118 $ 133,616 $ 307,612 $ 386,362 $ 150,624
========= ========= ========= ========= ========= =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
SEPARATE ACCOUNT VA-K - DELAWARE MEDALLION
- ------------------------------------------------------------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS, CONTINUED
- ------------------------------------------------------------------------------------------------------------------------------------
DGPF MULTIPLE STRATEGY DGPF INTERNATIONAL EQUITY
SUB-ACCOUNT 206 SUB-ACCOUNT 207
YEAR ENDED PERIOD FROM YEAR ENDED PERIOD FROM
12/31/95 4/19/94* TO 12/31/94 12/31/95 4/19/94* TO 12/31/94
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS:
Net investment income (loss)............................. $ 3,031 $ 884 $ 910 $ (867)
Net realized gain from security transactions............. 601 533 4,980 202
Net unrealized gain (loss) on investments................ 60,400 (2,476) 30,085 (1,825)
--------- --------- --------- ---------
Net increase (decrease) in net assets from operations.... 64,032 (1,059 35,975 (2,490)
--------- --------- --------- ---------
FROM CAPITAL TRANSACTIONS:
Net purchase payments.................................... 48,657 856 121,602 3,503
Terminations............................................. (2,617) (80) (11,001) (17,812)
Other transfers from the General Account of
First Allmerica Financial Life Insurance Company(Sponsor) 95,451 171,680 63,310 210,834
--------- --------- --------- ---------
Net increase in net assets from capital transactions..... 141,491 172,456 173,911 196,525
--------- --------- --------- ---------
Net increase in net assets............................... 205,523 171,397 209,886 194,035
NET ASSETS:
Beginning of year........................................ 171,397 -- 194,035 --
--------- --------- --------- ---------
End of year.............................................. $ 376,920 $ 171,397 $ 403,921 $ 194,035
========= ========= ========= =========
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
SEPARATE ACCOUNT VA-K - DELAWARE MEDALLION
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
DGPF VALUE DGPF EMERGING GROWTH
SUB-ACCOUNT 208 SUB-ACCOUNT 209
YEAR ENDED PERIOD FROM YEAR ENDED PERIOD FROM
12/31/95 5/10/94* TO 12/31/94 12/31/95 5/10/94* TO 12/31/94
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ (220) $ (362) $ (17,273) $ (813)
439 24 60,055 314
28,565 224 400,647 16,678
--------- -------- ----------- ----------
28,784 (114) 443,429 16,179
--------- -------- ----------- ----------
6,842 60 8,186 88
(5,527) -- (17,734) (13,289)
66,468 82,026 844,220 804,858
--------- -------- ----------- ----------
67,783 82,086 834,672 791,657
--------- -------- ----------- ----------
96,567 81,972 1,278,101 807,836
81,972 -- 807,836 --
--------- -------- ----------- ----------
$ 178,539 $ 81,972 $ 2,085,937 $ 807,836
========= ======== =========== ==========
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
SEPARATE ACCOUNT VA-K - DELAWARE MEDALLION
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 1995
NOTE 1 - ORGANIZATION
Separate Account VA-K - Delaware Medallion (VA-K) 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 certain variable annuity
policies issued by the Company. Effective October 16, 1995, concurrent with the
demutualization, the Company's name was changed from State Mutual Life Assurance
Company of America. Under applicable insurance law, the assets and liabilities
of VA-K are clearly identified and distinguished from the other assets and
liabilities of the Company. VA-K cannot be charged with liabilities arising out
of any other business of the Company.
VA-K is registered as a unit investment trust under the Investment Company
Act of 1940, as amended (the 1940 Act). VA-K currently offers nine Sub-Accounts
under the Delaware Medallion policies. Each Sub-Account invests exclusively in a
corresponding investment portfolio of the Delaware Group Premium Fund, Inc.
(DGPF or the Fund), managed by Delaware Management Company, Inc., or Delaware
International Advisors, Ltd. DGPF is an open-end, diversified series management
investment company registered under the 1940 Act.
Separate Account VA-K has two types of variable annuity policies, "qualified"
policies and "non-qualified" policies. A qualified policy is one that is
purchased in connection with a retirement plan which meets the requirements of
Section 401, 403, 408, or 457 of the Internal Revenue Code, while a
non-qualified policy is one that is not purchased in connection with one of the
indicated retirement plans. The tax treatment for certain partial redemptions or
surrenders will vary according to whether they are made from a qualified policy
or a non-qualified policy.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Investments - Security transactions are recorded on the trade date.
Investments in shares of DGPF are stated at the net asset value per share of the
respective investment portfolio of 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 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 VA-K. Therefore, no provision for income taxes has been charged
against VA-K.
Annuitant Mortality Fluctuation Reserve - A strengthening reserve required
for doing business in the state of New York. The purpose of this reserve is to
provide for future mortality experience which is less favorable than that
assumed in pricing the annuity. This reserve is funded by the Company.
NOTE 3 - INVESTMENTS
The number of shares owned, aggregate cost, and net asset value per share of
each Sub-Account's investment in 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>
201 Equity Income ........................... 61,048 $ 742,385 $ 14.83
202 High Yield .............................. 58,919 523,805 8.94
203 Capital Reserves ........................ 21,829 209,686 9.93
204 Money Market ............................ 13,332 133,316 10.00
205 Growth .................................. 25,566 330,726 15.13
206 Multiple Strategy ....................... 24,263 318,151 15.50
207 International Equity .................... 30,833 375,959 13.11
208 Value ................................... 14,334 149,958 12.47
209 Emerging Growth ......................... 148,957 1,671,048 14.02
</TABLE>
<PAGE>
NOTE 4 - RELATED PARTY TRANSACTIONS
The Company makes a charge of 1.25% per annum based on the average daily net
assets of each Sub-Account at each valuation date for mortality and expense
risks. The Company also charges each Sub-Account .15% per annum based on the
average daily net assets of each Sub-Account for administrative expenses. These
charges are deducted from the daily value of each Sub-Account but are paid to
the Company on a monthly basis.
A policy fee is currently deducted on the policy anniversary date and upon
full surrender of the policy when the accumulated value is $50,000 or less. The
policy fee is $30. The policy fee is currently waived for policies originally
issued as part of a 401(k) plan. For the year ended December 31, 1995, policy
fees deducted from accumulated value in VA-K amounted to $1,500.
Allmerica Investments, Inc., (Allmerica Investments), a wholly-owned
subsidiary of the Company, is principal underwriter and general distributor of
VA-K, and does not receive any compensation for sales of the VA-K - Delaware
Medallion policies. Commissions are paid by the Company to registered
representatives of broker-dealers who are registered under the Securities
Exchange Act of 1934 and are members of the National Association of Securities
Dealers. As the current series of policies have a contingent deferred sales
charge, no deduction is made for sales charges at the time of the sale. For the
year ended December 31, 1995, the Company received $3,892 for contingent
deferred sales charges applicable to VA-K.
<PAGE>
<TABLE>
<CAPTION>
NOTE 5 - POLICYOWNERS AND SPONSOR TRANSACTIONS
Transactions from policyowners and sponsor were as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
1995 1994
---- ----
UNITS AMOUNT UNITS AMOUNT
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sub-Account 201 -- Equity Income
Issuance of units .......................... 287,955 $ 328,945 490,513 $ 499,742
Redemption of units ........................ (72,819) (78,536) (35,513) (35,648)
---------- ----------- ----------- -----------
Net increase ............................... 215,136 $ 250,409 455,000 $ 464,094
========== =========== =========== ===========
Sub-Account 202 -- High Yield
Issuance of units .......................... 212,565 $ 230,720 306,020 $ 302,430
Redemption of unit ......................... (24,032) (33,762) (19,055) (18,711)
---------- ----------- ----------- -----------
Net increase ............................... 188,533 $ 196,958 286,965 $ 283,719
========== =========== =========== ===========
Sub-Account 203 -- Capital Reserves
Issuance of units .......................... 61,464 $ 71,855 208,909 $ 209,117
Redemption of units ........................ (46,880) (57,392) (28,182) (28,080)
---------- ----------- ----------- -----------
Net increase ............................... 14,584 $ 14,463 180,727 $ 181,037
========== =========== =========== ===========
Sub-Account 204 -- Money Market
Issuance of units .......................... 3,386,204 $ 3,481,696 2,590,101 $ 2,613,450
Redemption of units ........................ (3,562,119) (3,671,876) (2,288,031) (2,310,724)
---------- ----------- ----------- -----------
Net increase (decrease) (175,915) $ (190,180) 302,070 $ 302,726
========== =========== =========== ===========
Sub-Account 205 -- Growth
Issuance of units .......................... 231,302 $ 266,232 224,449 $ 227,170
Redemption of units ........................ (80,666) (88,464) (74,952) (72,990)
---------- ----------- ----------- -----------
Net increase ............................... 150,636 $ 177,768 149,497 $ 154,180
========== =========== =========== ===========
Sub-Account 206 -- Multiple Strategy
Issuance of units .......................... 140,441 $ 154,231 172,954 $ 172,536
Redemption of units ........................ (8,828) (12,740) (81) (80)
---------- ----------- ----------- -----------
Net increase ............................... 131,613 $ 141,491 172,873 $ 172,456
========== =========== =========== ===========
Sub-Account 207 -- International Equity
Issuance of units .......................... 317,663 $ 338,300 254,950 $ 258,568
Redemption of units ........................ (152,785) (164,389) (61,746) (62,043)
---------- ----------- ----------- -----------
Net increase ............................... 164,878 $ 173,911 193,204 $ 196,525
========== =========== =========== ===========
Sub-Account 208 -- Value
Issuance of units .......................... 76,697 $ 80,850 127,209 $ 127,330
Redemption of units ........................ (12,610) (13,067) (45,367) (45,244)
---------- ----------- ----------- -----------
Net increase ............................... 64,087 $ 67,783 81,842 $ 82,026
========== =========== =========== ===========
Sub-Account 209 -- Emerging Growth
Issuance of units .......................... 2,679,348 $ 2,937,785 803,511 $ 805,231
Redemption of units ........................ (1,983,643) (2,103,113) (13,103) (13,574)
---------- ----------- ----------- -----------
Net increase ............................... 695,705 $ 834,672 790,408 $ 791,657
========== =========== =========== ===========
</TABLE>
<PAGE>
NOTE 6 - DIVERSIFICATION REQUIREMENTS
Under the provisions of Section 817(h) of the Internal Revenue Code, a
variable annuity contract, other than a contract issued in connection with
certain types of employee benefit plans, will not be treated as an annuity
contract for federal income tax purposes for any period for which the
investments of the segregated asset account on which the contract is based are
not adequately diversified. The Code provides that the "adequately diversified"
requirement may be met if the underlying investments satisfy either a statutory
safe harbor test or diversification requirements set forth in regulations issued
by the Secretary of Treasury.
The Internal Revenue Service has issued regulations under Section 817(h) of
the Code. The Company believes that VA-K satisfies the current requirements of
the regulations, and it intends that VA-K will continue to meet such
requirements.
NOTE 7 - PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of the DGPF shares by VA-K during
the year ended December 31, 1995 were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
SUB-
ACCOUNT INVESTMENT PORTFOLIO PURCHASES SALES
- ------------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
201 Equity Income ................................ $ 357,067 $ 84,702
202 High Yield ................................... 268,744 36,879
203 Capital Reserves ............................. 81,841 56,273
204 Money Market ................................. 3,513,748 3,686,581
205 Growth ....................................... 246,781 71,234
206 Multiple Strategy ............................ 162,538 18,715
207 International Equity ......................... 336,627 161,723
208 Value ........................................ 81,857 14,180
209 Emerging Growth .............................. 2,911,767 2,092,414
----------- -----------
Totals $ 7,960,970 $ 6,222,701
=========== ===========
</TABLE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of First Allmerica
Financial Life Insurance Company and Policyowners
of Separate Account VA-K - Delaware Medallion
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 (201,
202, 203, 204, 205, 206, 207, 208, and 209) constituting the Separate Account
VA-K - Delaware Medallion 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 Fund, provide a reasonable basis
for the opinion expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
February 23, 1996
<PAGE>
PART C. OTHER INFORMATION
Item 24. FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS
FINANCIAL STATEMENTS INCLUDED IN PART A
None
FINANCIAL STATEMENTS INCLUDED IN PART B
Financial Statements for First Allmerica Financial Life Insurance Company
Financial Statements for Separate Account VA-K of First Allmerica
Financial Life Insurance Company
FINANCIAL STATEMENTS INCLUDED IN PART C
None
(B) EXHIBITS
Exhibit 1 - Vote of Board of Directors Authorizing Establishment of Registrant
dated August 20, 1991 was previously filed on May 11, 1992, in
Registration Statement No. 33-47858, and is herein incorporated by
reference.
Exhibit 2 - Not Applicable. Pursuant to Rule 26a-2, the Insurance Company may
hold the assets of the Registrant NOT pursuant to a trust indenture
or other such instrument.
Exhibit 3 - Underwriting and Administrative Services Agreement was previously
filed on November 1, 1993 and is herein incorporated by reference.
Schedule of Sales Commissions was previously filed on April 1,
1991, on Registration Statement No. 33-39702, and is herein
incorporated by reference.
Exhibit 4 - Policy Form A was previously filed on October 18, 1994 and is
incorporated herein by reference.
Policy Form B was previously filed on February 29, 1996 and is
incorporated herein by reference.
Exhibit 5 - Application Form A was previously filed on October 18, 1994 and
is herein incorporated by reference.
Application Form B was previously filed on February 29, 1996 and
is incorporated herein by reference.
Exhibit 6 - The Depositor's Articles of Incorporation and Bylaws as amended,
were and are incorporated herein by reference.
(b) - Revised By-Laws filed were previously filed in Post-Effective
Amendment No. 6 and is incorporated by reference herein.
Exhibit 7 - Not Applicable.
Exhibit 8 - AUV Calculation Services Agreement with The Shareholder Services
Group dated March 31, 1995, was previously filed and is herein
incorporated by reference.
Exhibit 9 - Consent and Opinion of Counsel is filed herewith.
Exhibit 10 - Consent of Independent Accountants is filed herewith.
Exhibit 11 - None.
Exhibit 12 - None.
Exhibit 14 - Not Applicable.
Exhibit 27 - Financial Data Schedules filed herewith.
Financial Data Schedules
Item 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR.
Name and Position Principal Occupation(s) During Past Five Years
- ----------------- ----------------------------------------------
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
<PAGE>
Mark R. Colborn Vice President and Controller, 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, 1985 to 1993
John F. Kelly Director of First Allmerica since 1996;
Senior Vice President and General Counsel,
First Allmerica
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 to 1992
to 1993; Manager, Price Waterhouse, 1987 to 1992
Richard M. Reilly Director of First Allmerica since 1996; Vice
President, First Allmerica; Director and
President, Allmerica Investments, Inc.;
Director and President, Allmerica Investment
Management Company, Inc. since 1992.
Larry C. Renfro Director of First Allmerica since 1996;
Vice President of First Allmerica
Theodore J. Rupley Director of First Allmerica since 1996;
Director, President, and CEO, The Hanover
Insurance Company since 1992; President,
Fountain Powerboats, 1992; President,
Metropolitan Property & Casualty Company,
1986-1992.
Phillip E. Soule Director of First Allmerica since 1996;
Vice President, First Allmerica
Eric Simonsen Director of First Allmerica since 1996;
Vice President and Chief Financial Officer,
First Allmerica
Diane E. Wood Director of First Allmerica since 1996; Vice
President, First Allmerica
<PAGE>
The principal business address of all the following Directors and
Officers is:
440 Lincoln Street
Worcester, Massachusetts 01653
<TABLE>
<S> <C>
Bruce C. Anderson Vice President and Assistant Secretary
First Allmerica Financial Life Insurance
Company
Abigail M. Armstrong Secretary and Counsel, First Allmerica
Financial Life Insurance Company
Mark R. Colborn Vice President and Controller, First
Allmerica Financial Life Insurance
Company
Kruno Huitzingh Vice President and Chief Information
Officer, First Allmerica Financial Life
Insurance Company
John F. Kelly Senior Vice President, General Counsel
and Assistant Secretary, First Allmerica
Financial Life Insurance Company
John F. O'Brien President and Chief Executive Officer
First Allmerica Financial Life Insurance
and Company
Edward J. Parry, III Vice President and Treasurer, First
Allmerica Financial Life Insurance
Company
Richard M. Reilly Vice President, First Allmerica Financial
Life Insurance company
Larry C. Renfro Vice President, First Allmerica Financial
Life Insurance Company
Theodore J. Rupley Director, First Allmerica Financial Life
Insurance and Annuity Company
Eric P. Simonsen Vice President and Chief Financial Officer
First Allmerica Financial Life Insurance
Company
Philip E. Soule Vice President, First Allmerica Financial
Life Insurance Company
Diane E. Wood Vice President, First Allmerica Financial
Life Insurance Company
</TABLE>
<PAGE>
Item 26. PERSONS UNDER COMMON CONTROL WITH REGISTRANT. See attached
organizational chart.
<TABLE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
<S> <C> <C>
AAM Equity Fund 440 Lincoln Street Massachusetts Grantor Trust
Worcester, MA 01653
Allmerica Asset Management, Inc. 440 Lincoln Street Investment advisory service
Worcester, MA 01653
Allmerica Employees Insurance 440 Lincoln Street Insurance Agency
Agency, Inc. Worcester, MA 01653
Allmerica Financial Service 440 Lincoln Street Insurance Agency
Insurance Agency, Inc. Worcester, MA 01653
Allmerica Funds 440 Lincoln Street Investment Company
Worcester, MA 01653
Allmerica institutional Services, 440 Lincoln Street Accounting, marketing
Inc. (formerly known as 440 Worcester, MA 01653 and shareholder services
Financial Group of Worcester, Inc.) for investment companies
Allmerica Investment 440 Lincoln Street Securities, retail broker-dealer
Management Company, Inc. Worcester, MA 01653
Allmerica Investments, Inc. 440 Lincoln Street Investment Company
Worcester, MA 01653
Allmerica Property and 440 Lincoln Street Investment Company
Casualty Companies, Inc. Worcester, MA 01653
Allmerica Securities Trust 440 Lincoln Street Investment Company
Worcester, MA 01653
Allmerica Services, Inc. 440 Lincoln Street Service Company
Worcester, MA 01653
Allmerica Trust Company, N.A. 440 Lincoln Street Limited purpose national
Worcester, MA 01653 trust company
AMGRO, Inc. 472 Lincoln Street Premium financing
Worcester, MA 01653
APC Funding Corp. 440 Lincoln Street Special purpose funding vehicle
Worcester, MA 01653 for commercial paper
Beltsville Drive Properties 440 Lincoln Street Real estate partnership
Limited Partnership Worcester, MA 01653
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Citizens Corporation 440 Lincoln Street Holding Company
Worcester, MA 01653
Citizens Insurance Company 645 West Grand River Multi-line fire & casualty
Howell, MI 48843 insurance
Citizens Insurance Company of 3950 Priority Way Multi-line fire & casualty
the Midwest South Drive, Suite 200 insurance
Indianapolis, IN 46280
Citizens Insurance Company of 8101 N. High Street Multi-line fire & casualty
Ohio P.O. Box 342250 insurance
Columbus, OH 43234
Citizens Management, Inc. 645 West Grand River Services Management
Howell, MI 48843 Company
Greendale Special Placement s 440 Lincoln Street Massachusetts Grantor Trust
Fund Worcester, MA 01653
The Hanover American Insurance 100 North Parkway Multi-line fire & casualty
Company Worcester, MA 01653 insurance
The Hanover Insurance Company 100 North Parkway Multi-line fire & casualty
Worcester, MA 01605 insurance
Hanover Texas Insurance 801 East Campbell Road Incorporated Branch Office of
Management Company, Inc. Richardson, TX 75081 The Hanover Insurance Company
Attorney-in-fact for Hanover
Lloyd's Insurance Company
Hanover Lloyd's Insurance Company 801 East Campbell Road Multiline fire & casualty insurance
Richardson, TX 75081
Hollywood Center, Inc. 440 Lincoln Street General business corporation
Worcester, MA 01653
Linder Skokie Real Estate 440 Lincoln Street General business corporation
Corporation Worcester, MA 01653
Lloyds Credit Corporation 440 Lincoln Street Premium financing service
Worcester, MA 01653 franchises
Logan Wells Water Company Inc. 603 Heron Drive Water Company, servicing
Bridgeport, NJ 08014 land development investment
Massachusetts Bay Insurance Company 100 North Parkway Multi-line fire and casualty
Worcester, MA 01653
SMA Financial Corp. 440 Lincoln Street Holding Company
Worcester, MA 01653
Allmerica Financial Life 440 Lincoln Street Life insurance, accident and
Insurance and Annuity Company Worcester, MA 01653 health insurance, annuities,
variable annuities and variable
life insurance
Somerset Square, Inc. 440 Lincoln Street General Business Corporation
Worcester, MA 01653
Sterling Risk Management 100 North Parkway Risk management services
Services, Inc. Worcester, MA 01605
</TABLE>
Item 27. NUMBER OF CONTRACTOWNERS.
As of December 31, 1995, there were 4,227 Policyowners of qualified Contracts
and 4.534 Policyowners of non-qualified Contracts.
Item 28. INDEMNIFICATION.
To the fullest extent permissible under Massachusetts General Laws, no
director shall be personally liable to the Company or any policyholder for
monetary damages for any breach of fiduciary duty as a director,
notwithstanding any provision of law to the contrary; provided, however, that
this provision shall not eliminate or limit the liability of a director:
1. for and breach of the director's duty of loyalty to the Company or its
policyholders;
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.
Item 29. PRINCIPAL UNDERWRITERS.
(a) Allmerica Investments, Inc. also acts as principal underwriter for the
following:
<PAGE>
- VEL Account, VEL II Account, Inheiritage Account, Separate Accounts VA-A,
VA-B, VA-C, VA-G, VA-H, VA-K, VA-P and Group Vel Account, Allmerica
Select Separate Account II, Allmerica Select Separate Account of
Allmerica Financial Life Insurance and Annuity Company
(b) The Principal Business Address of each of the following Directors and
Officers of Allmerica Investments, Inc. is:
440 Lincoln Street
Worcester, Massachusetts 01653
NAME POSITION OR OFFICE WITH UNDERWRITER
---- -----------------------------------
Abigail M. Armstrong Secretary and Counsel
Philip J. Coffey Vice President
John F. Kelly Director
John F. O'Brien Director
Stephen Parker President, Director and Chief Executive Officer
Edward J. Parry, III Treasurer
Richard M. Reilly Director
Eric A. Simonsen Director
Emil J. Aberizk Vice President
Thomas P. Cunningham Vice President
Chief Financial Officer and Controller
David J. Mueller Vice President
William F. Monroe, Jr. Vice President
Mark Steinberg Senior Vice President
Item 30. LOCATION OF ACCOUNTS AND RECORDS.
Each account, book or other document required to be maintained by Section 31(a)
of the Investment Company Act of 1940 and Rules 31a-1 to 31a-3 thereunder are
maintained by the Company at 440 Lincoln Street, Worcester, Massachusetts or on
behalf of the Company by First Data Investor Services Group, Inc. at 4400
Computer Drive, Westboro, Massachusetts 01581.
Item 31. MANAGEMENT SERVICES.
Effective March 31, 1995, the Company provides daily unit value
calculations and related services for the Company's separate accounts.
Item 32. UNDERTAKINGS.
(a) Subject to the terms and conditions of Section 15(d) of the Securities
Exchange Act of 1934, the undersigned registrant hereby undertakes to file with
the Securities and Exchange Commission such supplementary and periodic
information, documents, and reports as may be prescribed by any rule or
regulation of the Commission heretofore or hereafter duly adopted pursuant to
authority conferred in that section.
(b) The registrant hereby undertakes to include in the prospectus a postcard
that the applicant can remove to send for a Statement of Additional Information.
<PAGE>
(c) The registrant hereby undertakes to deliver a Statement of Additional
Information promptly upon written or oral request, according to the requirements
of Form N-4.
(d) Insofar as indemnification for liability arising under the 1933 Act may be
permitted to Directors, Officers and Controlling Persons of Registrant under any
registration statement, underwriting agreement or otherwise, Registrant has been
advised that, in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the 1933 Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by Registrant of expenses incurred or
paid by a Director, Officer or Controlling Person of Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
Director, Officer or Controlling Person in connection with the securities being
registered, Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the 1933 Act and will be governed by the final
adjudication of such issue.
Item 33. REPRESENTATIONS CONCERNING WITHDRAWAL RESTRICTIONS ON SECTION 403(b)
PLANS AND UNDER THE TEXAS OPTIONAL RETIREMENT PROGRAM.
Registrant, a separate account of First Allmerica Financial Life Insurance
Company ("Company"), states that it is (a) relying on Rule 6c-7 under the
1940 Act with respect to withdrawal restrictions under the Texas Optional
Retirement Program ("Program") and (b) relying on the "no-action" letter
(Ref. No. IP-6-88) issued on November 28, 1988 to the American Council of
Life Insurance, in applying the withdrawal restrictions of Internal Revenue
Code Section 403(b)(11). Registrant has taken the following steps in
reliance on the letter:
1. Appropriate disclosures regarding the redemption/withdrawal restrictions
imposed by the Program and by Section 403(b)(11) have been included in the
prospectus of each registration statement used in connection with the offer
of the Company's variable contracts.
2. Appropriate disclosures regarding the redemption restrictions imposed by the
Program and by Section 403(b)(11) have been included in sales literature
used in connection with the offer of the Company's variable contracts.
3. Sales Representatives who solicit participants to purchase the variable
contracts have been instructed to specifically bring the redemption/
withdrawal restrictions imposed by the Program and by Section 403(b)(11)
to the attention of potential participants.
4. A signed statement acknowledging the participant's understanding of (i) the
restrictions on redemption/withdrawal imposed by the Program and by Section
403(b)(11) and (ii) the investment alternatives available under the
employer's arrangement will be obtained from each participant who purchases
a variable annuity contract prior to or at the time of purchase.
Registrant hereby represents that it will not act to deny or limit a transfer
request except to the extent that a Service-Ruling or written opinion of
counsel, specifically addressing the fact pattern involved and taking into
account the terms of the applicable employer plan, determines that denial or
limitation is necessary for the variable annuity contracts to meet the
requirements of the Program or of Section 403(b). Any transfer request not so
denied or limited will be effected as expeditiously as possible.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the registrant certifies that it meets all of the
requirements for effectiveness of this 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 26th day of June, 1996.
FIRST ALLMERICA FINANCIAL LIFE
INSURANCE COMPANY
SEPARATE ACCOUNT VA-K
Attest:/s/ Abigail M. Armstrong
---------------------------------
Abigail M. Armstrong
Secretary and Counsel
Pursuant to the requirements of the Securities Act of 1933, this Amendment to
the Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
/s/ John F. O'Brien /s/ John F. Kelly
John F. O'Brien John F. Kelly
Director, Chairman of the Board, Director, Senior Vice President,
President and Chief Executive Officer Assistant Secretary and General
Counsel
/s/ Richard M. Reilly /s/ James R. McAuliffe
Richard M. Reilly James R. McAuliffe
Director and Vice President Director
/s/ Eric A. Simonsen /s/ Larry C. Renfro
Eric A. Simonsen Larry C. Renfro
Director, Vice President and Chief Director and Vice President
Financial Officer
/s/ Bruce C. Anderson /s/ Theodore J. Rupley
Bruce C. Anderson Theodore J. Rupley
Director and Vice President Director
/s/ Mark R. Colborn /s/ Phillip E. Soule
Mark R. Colborn Phillip E. Soule
Vice President and Controller Director and Vice President
/s/ Kruno Huitzingh /s/ Diane E. Wood
Kruno Huitzingh Diane E. Wood
Director, Vice President and Director, Vice President and
Chief Information Officer Chief Investment Officer
<PAGE>
EXHIBIT TABLE
Exhibit 9 - Consent and Opinion of Counsel
Exhibit 10 - Consent of Independent Accountants
Exhibit 27- Financial Data Schedules
<PAGE>
EXHIBIT 9
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
July 3, 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 Separate Account VA-K on Form N-4
under the Securities Act of 1933 and the Investment Company Act of 1940,
with respect to the Company's group variable annuity policies.
I am of the following opinion:
1. Separate Account VA-K is a separate account of the Company validly existing
pursuant to the Massachusetts Insurance Code and the regulations issued
thereunder.
2. The assets held in Separate Account VA-K are not chargeable with
liabilities arising out of any other business the Company may conduct.
3. The group variable annuity 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 this
Post-Effective Amendment to the Registration Statement of Separate Account
VA-K filed under the Securities Act of 1933.
Very truly yours,
/s/ Sheila B. St. Hilaire
Sheila B. St. Hilaire
Counsel
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 7 to the Registration
Statement on Form N-4 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 Separate Account VA-K Delaware Medallion of First Allmerica
Financial Life Insurance Company, both of which appear in such Statement of
Additional Information. We also consent to the reference to us under the
heading "Experts" in such Statement of Additional Information.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Boston, Massachusetts
July 3, 1996
<TABLE> <S> <C>
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